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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
</TABLE>
OR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-26756
------------------------
GEOGRAPHICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
WYOMING 87-0305614
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1555 ODELL ROAD, P.O. BOX 1750, 98231
BLAINE, WA
(Address of principal executive (Zip code)
offices)
</TABLE>
Registrant's telephone number including area code: (360) 332-6711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- -------------------------------------- --------------------------------------
<S> <C>
COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET SYSTEM
</TABLE>
--------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Common stock, no par value per share ("Common Stock"), was the only class of
voting stock of the Registrant outstanding on September 8, 1997. Based on the
closing sales price of the Common Stock on the Nasdaq National Market System as
reported on September 8, 1997 of $.78, the aggregate market value of the Common
Stock held by persons other than officers, directors and persons known to the
Registrant to be the beneficial owner (as that term is defined under the rules
of the Securities and Exchange Commission) of more than five percent of the
Common Stock on that date was approximately $7,384,944. By the foregoing
statements, the Registrant does not intend to imply that any of these officers,
directors or beneficial owners are affiliates of the Registrant or that the
aggregate market value, as computed pursuant to rules of the Securities and
Exchange Commission, is in any way indicative of the amount which could be
obtained for such shares of Common Stock.
The number of shares of Common Stock outstanding as of September 8, 1997 was
9,467,877.
DOCUMENTS INCORPORATED BY REFERENCE
None
PAGE 1 OF 41 PAGES
Index to exhibits appears on page 39
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<PAGE>
ITEM 1. BUSINESS
GENERAL
Geographics, Inc. (the "Company" or "Geographics") was incorporated as a
Wyoming corporation on September 20, 1974. The Company is engaged in the
development, manufacture, marketing and distribution of specialty paper
products, generally made using pre-printed designs, including stationery,
business cards, brochures, memo pads and paper cubes. The Company also
manufactures and markets rub-on and stick-on lettering, stencils, graphics arts
products and other signage products.
The Company's fiscal year end is March 31. The Company's executive offices
and domestic operations are located at 1555 Odell Road, Blaine, Washington
98231, and its telephone number is (360) 332-6711.
FORWARD-LOOKING STATEMENTS
Statements herein concerning expectations for the future constitute
forward-looking statements which are subject to a number of known and unknown
risks, uncertainties and other factors which might cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in the preprint paper market; anticipated
growth in the Company's sales; anticipated growth in sales of specialty paper
products as a percentage of revenue; the Company's ability to increase its
market share within the preprint industry; the ability of the Company to
successfully implement price increases for the Company's products when and as
needed; trends relating to the Company's profitability and gross profits
margins; the ability of the Company to implement a management information
system, including an electronic data interchange system, adequate to meet
operations requirements in the future and to improve its internal controls; the
ability of the Company to refinance its existing revolving credit facility, to
identify potential buyers for all or part of its business or to raise additional
debt or equity financing sufficient to meet its working capital requirements;
and the ability of the Company to continue operations as a going concern.
Relevant risks and uncertainties include, but are not limited to, slower than
anticipated growth of the preprint papers market; loss of certain key customers;
insufficient consumer acceptance of the Company's specialty paper products;
unanticipated actions, including price reductions, by the Company's competitors;
unanticipated increases in the costs of raw materials used to produce the
Company's products; loss of favorable trade credit, supply terms, reliable and
immediately available raw material supply and other favorable terms with certain
key vendors; greater than expected costs incurred in connection with the
implementation of a management information system; inability to implement an
electronic data interchange system adequate to support the Company's operations;
failure to realize expected economic efficiencies of the Company's automated
production system; the inability to hire and retain key personnel; unexpected
increases in the overall costs of production as a result of collective
bargaining arrangements; unfavorable determinations of pending lawsuits or
disputes; and inability to secure additional working capital when and as needed.
Additional risks and uncertainties include those described under "Risk Factors"
below and those described from time to time in the Company's other filings with
the Securities and Exchange Commission, press releases and other communications.
BACKGROUND
From its inception in 1974 until fiscal 1991, the Company was engaged
exclusively in the manufacture and wholesale marketing of various rub-on and
stick-on lettering, stencils, graphics arts products and other signage products.
In 1991, the Company began the development of "pre-print" or "specialty" paper
products consisting of paper on which photographs or other art images are
printed and which is then cut to size. In 1992, the Company introduced its first
specialty paper product under the Geopaper brand name. The Company now has
several specialty paper products made using Geopaper designs, including
stationery, business cards, brochures, memo pads and paper cubes which, in North
America, are sold primarily to office supply superstores, including Office Depot
and OfficeMax, and mass market retailers, such as Wal-Mart, and which are also
distributed internationally through the Company's subsidiaries in Canada,
Page 2 of 41 Pages
<PAGE>
Europe and Australia. The specialty papers group now constitutes the Company's
principal business, with approximately 71% of the Company's total sales in
fiscal 1997 attributable to sales of Geopaper products. Primarily as a result of
sales generated by the specialty papers group, the Company has experienced
substantial growth, with total sales increasing from $6,900,875 for fiscal 1994
to $23,840,506 for fiscal 1997, an increase of 245%.
Primarily to develop its specialty papers group, the Company has made
substantial investments to expand facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company has experienced
delays, set-backs and unanticipated additional expenses in the installation of
the production equipment and the management information system. Moreover, the
management information system has failed to perform as promised by vendors. As a
result, the Company has not yet realized the originally anticipated economic
benefits and efficiencies from these capital expenditures. See "--Management
Information System--Operations Software" "--Management Information
Systems--Electronic Data Interchange (EDI)" and "--Risk Factors--Implementation
of Automated Production Equipment." These unanticipated expenses and operational
inefficiencies, together with price reductions for the Company's products and
cost increases for certain raw materials, have had a negative impact on the
Company's gross margins and contributed to a substantial net loss for fiscal
1997. In addition, since May 1997, the Company has been in default of several
financial covenants under its revolving credit facility, the Company's primary
source of working capital, and borrowings under the facility have exceeded
permitted borrowing base limitations. The existence of these defaults
constitutes a default under the Company's mortgage loans and equipment lease
facilities. The report of the Company's auditors included in this Report states
that the Company's fiscal 1997 losses and non-compliance with covenants under
its revolving credit facility raise substantial doubt about the Company's
ability to continue as a going concern.
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Accordingly,
the Company is continuing to seek extended payment terms from its vendors,
delaying purchases of raw materials, instituting internal cost reduction
measures and taking other steps to conserve operating capital. As a result, the
Company's vendors may place the Company on credit hold or take other actions
against the Company, including the termination of their relationship with the
Company or the initiation of collection proceedings. See "--Risk
Factors--Dependence on Key Vendors." In addition, the Company is actively
pursuing possible sources of additional capital and has engaged an investment
banker to assist in the evaluation and pursuit of financing transactions, which
could include the issuance of debt or equity securities or the sale of all or
part of the Company's assets. However, as of the date of this Report, the
Company had received no firm commitments with respect to any such transaction
and there can be no assurance that any such transaction will be identified.
Further, there can be no assurance that the Company will be able to obtain
additional sources of additional working capital when and as needed or that the
terms of any such funding will be acceptable to the Company or in the best long-
term interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and to
extend the expiration date of, the revolving credit facility, or to otherwise
obtain sufficient funds when and as needed to satisfy its working capital
requirements could force the Company to curtail operations, seek extended
payment terms from its vendors or seek protection under the federal bankruptcy
laws. See "--Risk Factors--Ability to Continue as a Going Concern; Defaults
under Credit Facility; Need for Additional Working Capital" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources."
Page 3 of 41 Pages
<PAGE>
INDUSTRY
The market for preprinted papers ("preprints") includes preprinted cut sheet
papers used for letterheads, brochures, flyers and bulletins. Suppliers within
the preprint industry also offer combination sets made up of multiple products
such as matching letterhead, envelopes and business cards, or software packages
that improve ease of use of preprints by the consumer. New designs and a large
variety of preprints and related specialty products have been important elements
of success and growth for businesses in the preprint market.
The preprint market is segmented among two major methods of distribution:
retail, making up approximately 25% of the current total domestic preprint
market, and direct mail, which is estimated to represent approximately 75% of
the market. Within the retail segment of the preprint market there are numerous
sub-segments, including office supply superstores, mass market retailers, arts &
crafts stores, party stores, specialty paper retailers, and office supply
business-to-business retailers. The Company sells its specialty paper products
exclusively in the retail segment of the preprint market, primarily to office
supply superstores such as Office Depot and OfficeMax and mass market retailers
such as Wal-Mart.
Large retailers somewhat dominate the retail segment of the preprint
industry, and as such, exert considerable influence over the operations of the
relatively smaller suppliers, such as the Company, that service them in the
preprint market. Of particular importance are the factors such as pricing,
monetary requirements for the retailers selling programs (including such
expenses as volume rebates and advertising allowances), prompt order turnaround
which in turn requires the maintenance of large inventories, and payment terms,
including prompt pay discounts and extended and seasonal terms. See "--Risk
Factors-- Competition", "--Risk Factors--Maintenance of Large Inventory of
Products" and "--Risk Factors-- Customer Concentrations."
Compared to the preprint market, the market for the Company's lettering and
signage products is smaller, more mature, slower-growing and more narrowly
focused to the office supply and arts and crafts market. Though the total dollar
volume of this market segment is unknown, the Company has experienced little or
no growth in its lettering and signage revenues over the past five years.
PRODUCTS
The products manufactured by the Company are separated into two major
product groups: (1) specialty papers, and (2) lettering and signage.
The specialty papers group consists of paper on which photographs or other
art images are printed and which is then cut to size. In 1992, the Company
introduced its first specialty paper product under the Geopaper brand name. The
Company now has several specialty paper products made using Geopaper designs,
including stationery, business cards, brochures, memo pads and paper cubes.
These specialty paper products are often designed to be used with personal
computer printers. The specialty papers group now constitutes the Company's
principal business, with approximately 71% of the Company's total sales in
fiscal 1997 attributable to sales of Geopaper products. See "--Sales by Product
Category."
The lettering and signage group manufactures and distributes rub-on and
stick-on lettering, stencils, electronic moving message signs, American
Disabilities Act signs in Braille, and other signage products. This product
group represented 29% of sales in fiscal 1997, down from 35%, 79% and 97% of
sales during fiscal 1996, 1995 and 1994, respectively. The Company expects this
product group to continue to decrease as a percentage of sales and that sales of
lettering and signage products as an industry will continue to decline over time
as the use of personal computers increases.
Page 4 of 41 Pages
<PAGE>
SALES BY PRODUCT CATEGORY
The percentage of the Company's approximate total sales attributable to each
class of product offered by the Company for the last three years is set forth
below.
AS A PERCENTAGE OF SALES
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
CLASS OF PRODUCT 1997 1996 1995
- ------------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Designer stationeries and specialty papers................................................. 71% 65% 21%
Lettering, signage, stencil and graphic art products....................................... 29% 35% 79%
</TABLE>
STATED IN U.S. DOLLARS (ROUNDED)
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------
CLASS OF PRODUCT 1997 1996 1995
- --------------------------------------------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
Designer stationeries and specialty papers........................... $ 16,900,000 $ 14,800,000 $ 2,100,000
Lettering, signage, stencil and graphic art products................. $ 6,900,000 $ 7,800,000 $ 8,100,000
</TABLE>
SALES/ASSETS BY GEOGRAPHIC LOCATION
Financial information relating to foreign and domestic operations and export
sales (all foreign sales are export sales) is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Sales to Domestic and Foreign Customers
United States..................................................... $ 18,426,816 $ 19,477,370 $ 8,755,853
Canada(1)......................................................... $ 3,872,621 2,854,935 1,271,898
Europe............................................................ $ 715,327 281,330 158,385
Australia......................................................... $ 825,697 0 0
------------- ------------- -------------
Total........................................................... $ 23,840,506 $ 22,613,635 $ 10,186,136
------------- ------------- -------------
------------- ------------- -------------
Operating profit or (loss):
United States..................................................... $ (5,250,250) $ 2,081,817 $ 680,806
Canada(1)......................................................... $ (473,296) 377,328 98,831
Europe............................................................ $ (727,467) 65,316 12,307
Australia......................................................... $ 189,715 0 0
------------- ------------- -------------
Total........................................................... $ (6,261,298) $ 2,524,461 $ 791,944
------------- ------------- -------------
------------- ------------- -------------
Identifiable assets:
United States..................................................... $ 27,464,715 $ 24,263,181 $ 10,705,943
Europe............................................................ $ 940,046 410,060 0
Canada(2)......................................................... $ 1,058,046 64,800 (91,270)
Australia......................................................... $ 782,894 0 0
------------- ------------- -------------
Total........................................................... $ 30,245,701 $ 24,738,041 $ 10,614,673
------------- ------------- -------------
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</TABLE>
(1) Effective April 1, 1996, Geographics--Canada succeeded Martin Distribution,
Inc. ("Martin Distribution") as the exclusive importer of Geographics
products into Canada. Martin Distribution was at the time owned and
controlled by one of the Company's then-acting directors. All export sales
to Canada in fiscal 1997 were to Geographics--Canada. All export sales to
Canada in fiscal 1996 and fiscal 1995 were to Martin Distribution.
(2) In fiscal 1995, the Company's borrowings from International Geographics of
Ontario, a Canadian partnership in which the Company had a majority
interest, exceeded investments and other assets held in the partnership,
resulting in a net liability in Canada.
Page 5 of 41 Pages
<PAGE>
International sales accounted for approximately 22%, 14%, and 11% of the
Company's total net sales in fiscal 1997, 1996 and 1995, respectively.
International sales were concentrated in Canada, Europe and Australia. As a
result of such international sales, a significant portion of the Company's
revenues will be subject to certain risks, including unexpected changes in
regulatory requirements, exchange rates, tariffs and other barriers, political
and economic instability and other risks. See "--Risk Factors--International
Subsidiaries" and "--Risk Factors--Foreign Exchange and International Trade."
BUSINESS CONCENTRATIONS
Historically, a substantial portion of the Company's sales have been to a
limited number of customers. Concentration of sales to the Company's five
largest customers is detailed below:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
CUSTOMER 1997 1996 1995
- ------------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
Office Depot Inc......................................................... 31% 40% 31%
OfficeMax, Inc........................................................... 26% 24% 16%
Martin Distribution, Inc.(1)............................................. 0% 13% 12%
Business Depot, Inc.(2).................................................. 10% 0% 0%
United Stationers Inc.................................................... 3% 3% 6%
Wal-Mart Stores, Inc..................................................... 4% 3% 1%
-- -- --
74% 83% 66%
</TABLE>
(1) Effective April 1, 1996, Geographics--Canada succeeded Martin Distribution
as the exclusive importer of Geographics products into Canada.
(2) Business Depot, Inc. (Staples of Canada) sales were included in sales of
Martin Distribution for 1996 and 1995.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. See "--Risk Factors--Customer Concentrations."
PURCHASING
The Company's principal purchases are materials for use in the manufacture
of specialty paper and lettering and signage products. In particular, the
Company routinely purchases sheets, rolls and reams of commodity paper, as well
as other direct materials involved in the printing and packaging of its Geopaper
product lines, such as inks, packaging film, labels, shipping boxes and other
materials. In addition, the Company requires a steady supply of the vinyl sheets
used in the manufacture of its lettering products. Certain of the products used
in the manufacture of the Company's products are considered commodities, and as
such can vary significantly in cost from time to time. Though prices may vary,
the Company has not experienced and does not currently anticipate any market
shortages of supply of the specific raw materials that it purchases and uses in
the manufacture of its products.
The Company's success depends in large part on reliable and uninterrupted
supply of raw materials from its major vendors. Although the Company purchases
goods from approximately 1,100 vendors, it generally practices a "sole source"
approach to vendor selection in that it typically relies on a single vendor for
all purchases on its various categories of production materials, and other major
categories of purchased goods and services. One key vendor of commodity paper
and other raw materials and supplies is Unisource, a broker/vendor who
represented 48% of the Company's total purchases during the fiscal 1997.
Unisource has provided the Company an immediately available and uninterrupted
supply of paper. In addition, Unisource and other key vendors have granted the
Company significant amounts of trade credit, along with favorable pricing and
payment terms. Although the Company may be able to find other sources of supply
for commodity paper and other major raw material categories, there can be no
assurance that potential new vendors, once sourced, would provide an
uninterrupted supply of raw materials or adequate levels of trade credit,
competitive prices or acceptable payment terms. See "--Risk Factors--Dependence
on Key Vendors."
Page 6 of 41 Pages
<PAGE>
DISTRIBUTION
The Company sells its products on a wholesale basis primarily to retailers,
including office supply superstores, mass market retailers, arts & crafts
stores, party stores, specialty paper retailers, and office supply
business-to-business catalog retailers. The Company also markets its products to
office supply distributors in the U.S. and to distributors in those countries
where the Company does not service retailers directly. Historically, the Company
has sold a substantial portion of its products to a limited number of retail
customers, and the Company believes that this trend can be expected to continue
in the future. See "--Business Concentrations" and "--Risk Factors--Customer
Concentrations."
The Company conducts its export operations through three subsidiaries:
- Geographics Marketing Canada, Inc. ("Geographics--Canada") was
incorporated as a British Columbia, Canada corporation on July 31, 1995.
The offices of Geographics--Canada are located at 17735 1st Ave., Suite 1,
Surrey, B.C. V4P 2K1, Canada, and its telephone number is 800-426-5923.
Geographics--Canada was established to import the Company's products into
Canada and market them to wholesale and retail distribution channels.
- Geographics (Europe) Limited ("Geographics--Europe") was incorporated in
England on December 12, 1995. The offices of Geographics--Europe are
located at 4 Iceni Court, Letchworth, Herts SG6 1TN, England, and its
telephone number is 01462-487100. Geographics--Europe was established to
import, warehouse, market and distribute the Company's products throughout
Europe.
- Geographics Australia Pty. Ltd. ("Geographics--Australia") was
incorporated in Brisbane, Australia on June 28, 1996. The offices of
Geographics--Australia are located at 3/32 Lillian Fowler Place,
Marrickville NSW 2204, Australia and its telephone number is
61-2-9519-4488. Geographics-- Australia was organized to import,
warehouse, market and distribute the Company's products throughout
Australia.
MANAGEMENT INFORMATION SYSTEMS--INTEGRATED OPERATIONS SOFTWARE
Over the course of fiscal 1996 and fiscal 1997, the Company invested
significant financial and operational resources in the installation of hardware
and software systems designed to integrate all major aspects of the Company's
operations. During this time period, the Company pursued the selection and
implementation of an integrated software package that would address the
Company's MIS needs in sales history, warehousing, manufacturing, distribution,
purchasing, inventory control, merchandise planning and replenishment, and
various financial systems. Through a process of elimination, the Company
selected an integrated package and began the installation in fiscal 1997. During
this time, the Company invested significant financial resources in outside
consultants for the design, installation and ongoing refinement of this system.
During fiscal 1997, the Company determined the need to replace this system and
therefore elected to write-off effectively all of its investment in the system
software, consulting fees and certain other implementation expenditures. The
Company has determined that it will need to invest further significant resources
to implement a new system of integrated software over the course of fiscal 1998
and possibly future periods. See "--Risk Factors--Management Information
Systems."
MANAGEMENT INFORMATION SYSTEMS--ELECTRONIC DATA INTERCHANGE (EDI)
The Company currently utilizes EDI to transact business with its largest
customers. Presently, approximately 70% to 80% of customer orders and invoices
are transacted by EDI. In fiscal 1997, the Company invested significant
financial and operational resources toward the installation of a new, higher
capacity EDI software package in order to meet current demand and projected
increases in the volume and type of EDI transactions. In fiscal 1998, the
Company determined that the software package and related systems implemented may
not be adequate to support the Company's future EDI requirements. In addition,
the Company expended substantial resources with a consultant in the
implementation of this EDI software package and the Company remains highly
dependent on this consultant to support its current method of processing EDI
transactions. The Company has determined that it may need to find or develop
in-house EDI
Page 7 of 41 Pages
<PAGE>
expertise and implement new EDI systems to ensure reliable transactions, minimum
acceptable customer service, sufficient operational efficiency, and to provide
management with the ability to monitor critical performance factors with major
customers. See "--Risk Factors--Electronic Data Interchange."
COMPETITION
The Company operates in a highly competitive environment. Competition can be
separated into two areas in which the Company conducts business: designer
stationery and lettering and signage. The Company's designer stationery products
compete in most of the Company's markets with Paper Direct, Inc., Taylor, Inc.,
American Pad and Paper, Inc., Z-International, Inc., and REDIFORM, Inc. (a
division Moore Corp Ltd.). The Company's designer stationery products compete
for limited shelf space in the office products superstores, office product
stores, mass market stores, contract stationers, wholesalers, office product
catalogs and mail order catalogs.
The Company's traditional lettering and signage operation competes with
several companies that produce similar products (i.e. vinyl lettering, stencil,
rub-on lettering). These competitors include Visu-com, Inc., Chartpak, Inc. and
Duro-Art Inc. The Company's products compete for limited shelf space in the
office products superstores, office product stores, mass market stores, contract
stationers, wholesalers, and office product catalogs.
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized and have substantially greater financial, marketing
and human resources. Moreover, the development and manufacture of new designer
stationeries and specialty papers are highly capital intensive. In order to
remain competitive, the Company may be required to continue to make significant
expenditures for capital equipment, sales, service, training and support
capabilities, investments in systems, procedures and controls, expansions of
operations and research and development, among many other items. Additional
financing might be required to fund the Company's investments in those areas.
There can be no assurance that additional financing will be available on terms
acceptable to the Company. See "--Risk Factors--Competition" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
The Company implemented a series of price changes with respect to its
specialty paper products in part due to pressure to remain competitive with its
larger competitors and in part to increase market share within the preprint
industry. In April and August of 1996, the Company made significant reductions
in the prices it charged to substantially all of its specialty paper customers.
While these price reductions increased the Company's market share, they had a
direct material negative impact on the Company's gross profits and gross profit
margins in fiscal 1997, when compared to prior years. Subsequent to the end of
fiscal 1997, the Company implemented a further general reduction in the prices
of substantially all of its specialty paper products.
In response to the reduced gross profits and gross profit margins in fiscal
1997, the Company implemented a general price increase on its specialty paper
products, which took effect on August 1, 1997. The Company may determine that
future price increases are necessary in order to offset increases of the costs
of raw materials, direct labor, production overhead or other components of the
Company's product costs and to improve or maintain gross profit margins. There
can be no assurance that the August 1, 1997 price increase or any future price
increases will be successfully implemented. The Company operates in a highly
competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
price levels. Either the potential failure to successfully increase prices, or
the potentially diminished competitive position once a price increase is
successfully implemented could have material adverse effect on the Company's
business, financial condition or results of operations. See "--Risk
Factors--Competition."
Page 8 of 41 Pages
<PAGE>
TRADEMARKS AND COPYRIGHTS
The Company maintains five registered trademarks in the U.S., Canada and
Australia: (1) GEOPAPER, (2) GEOTYPE, (3) GEOTAPE, (4) GEOSTENCIL, and (5)
GEOSIGN. In addition, the Company maintains two additional registered trademarks
in the U.S.: (1) SHIELD 'N' SEE, and (2) GEOFOIL and one additional registered
trademark in Canada: GEO. The Company's trademarks have various expiration dates
from 2002 to 2006 in the U.S., expiration dates in 2005 in Canada, and
expiration dates in 2011 in Australia. The Company has six applications pending
with the U.S. Patent and Trademark Office for federal trademark registration for
Geographics product lines. In addition, the Company has two registered U.S.
copyrights for the following products, "GEOCRUMPLED" and "GEOCLOUDS".
The Company considers consumer awareness of its products and brand names an
important factor in creating demand for its products among office supply stores
and other existing or prospective customers. Part of the Company's strategy for
increasing consumer awareness is to establish consistent brand identity across
all of its major product lines. The Company believes that its trademarks and
copyrights play an important role in this effort.
While the Company has made reasonable efforts to protect its intellectual
property, including registering them as trademarks and copyrights in the
countries where the product lines are marketed, to the extent that such
protections are inadequate, the Company could lose all or a part of these rights
which, in turn, could result in the diminution of the Company's overall brand
identity or individual product line identities. Either the loss of intellectual
property rights or the diminution of the Company's brand identities could have a
material adverse effect on the Company. See "Risk Factors--Uncertain Protection
of Intellectual Property Rights".
SEASONALITY
A significant portion of the Company's customer orders are placed between
August and October of each year for shipment during the Company's third fiscal
quarter, which includes the Christmas season, with the largest levels of sales
historically occurring in the second half of the calendar year. As a result, the
Company has experienced, and is expected to continue to experience, seasonal
fluctuations in its operating results based upon past purchasing patterns.
BACKLOG
The Company's backlog of orders as of September 8, 1997 was $2,180,117. The
Company expects to fill substantially all of these orders during the second
quarter of 1997. The Company includes in backlog the value of all purchase
orders received from customers for product not yet shipped and invoiced. Because
the Company only recently implemented internal controls necessary to determine
backlog, the Company is unable to determine backlog at March 31, 1997 or at the
end of any prior period. The Company's backlog is subject to fluctuations as a
result of seasonality in the Company's business and other factors and is,
therefore, not necessarily indicative of future sales. There can be no assurance
that current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
EMPLOYEES
At March 31, 1997, the Company had approximately 250 employees, 235 of whom
were employed at its headquarters in Blaine, Washington, 7 of whom were employed
at the Company's facilities in the United Kingdom, and 8 of whom were employed
at the Company's facilities in Australia. At March 31, 1997, the manufacturing,
warehousing and product distribution aspects of the Company's business employed
211
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employees, 20 employees worked in administration and 19 employees worked in
various managerial positions. As of the date of this Report, none of the
Company's employees were subject to a collective bargaining agreement. However,
during the second quarter of fiscal 1998, a group of the Company's employees
successfully petitioned for an election to determine if they would be
represented by a union, and an election date was set for October 2, 1997. If a
majority of the Company's employees elect to join the union, the Company will be
required to engage in good faith negotiations with the union for a collective
bargaining agreement. The Company cannot predict the outcome of the election by
its employees or the results of the negotiations of, or the terms of, the
collective bargaining agreement. The terms of any such collective bargaining
agreement could result in an increase in overall costs of production. In
addition, depending on the position taken by the union in its negotiations with
the Company, there could be an increased risk of labor strikes or work
stoppages. Any of these factors could have a material adverse effect on the
Company's business, financial condition or results of operations. As of the date
of this Report, the Company had never experienced a work stoppage and believes
that its relationship with its employees is good.
EXECUTIVE OFFICERS
The information concerning certain executive officers of the Company which
is set forth in "Item 10. Directors and Executive Officers" of Part III of this
Report is incorporated into this Item 1 of Part I of this Report by this
reference.
RISK FACTORS
PROSPECTIVE INVESTORS ARE STRONGLY CAUTIONED THAT AN INVESTMENT IN THE
COMPANY INVOLVES A VERY HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD NOT
DISMISS, AS "BOILERPLATE" OR "CUSTOMARY," DISCLOSURE OF THE RISK FACTORS SET
FORTH BELOW. THE CONTINGENCIES AND OTHER RISKS DISCUSSED BELOW COULD AFFECT THE
COMPANY IN WAYS NOT PRESENTLY ANTICIPATED BY ITS MANAGEMENT AND THEREBY HAVE A
MATERIAL ADVERSE EFFECT ON THE VALUE OF ITS COMMON STOCK. A CAREFUL REVIEW AND
UNDERSTANDING OF EACH OF THE RISK FACTORS SET FORTH BELOW, AS WELL AS THE OTHER
INFORMATION CONTAINED IN THIS REPORT IS ESSENTIAL FOR AN INVESTOR SEEKING TO
MAKE AN INFORMED DECISION WITH RESPECT TO THE COMPANY.
ABILITY TO CONTINUE AS A GOING CONCERN; DEFAULTS UNDER CREDIT FACILITY; NEED FOR
ADDITIONAL WORKING CAPITAL
As a result of the rapid growth of the Company's specialty papers group,
capital expenditures relating to the purchase and installation of an automated
production system and a management information system, operating losses and
other factors, the Company has required, and continues to require, substantial
external working capital. Moreover, subsequent to the end of fiscal 1997, the
Company has experienced working capital short-falls which have required the
Company to delay payments to certain vendors, delay purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital.
At the date of this Report, the Company's only available source of working
capital consisted of borrowings available under its revolving credit facility.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources." Since May 1997, the
Company has failed to comply with the net worth, debt-to-equity ratios and cash
flow coverage ratios under the revolving credit facility, and borrowings under
the facility exceeded the permitted borrowing base limitations. The Company's
lender has also provided the Company with several mortgage loans and equipment
loans, and the existence of the defaults under the revolving credit facility
constitutes a default under these other loans. The report of the Company's
auditors included in this Report states that the Company's fiscal 1997 losses
and non-compliance with covenants under its revolving credit facility raise
substantial doubt about the Company's ability to continue as a going concern.
The Company entered into a forbearance agreement with its lender, effective
August 31, 1997, pursuant to which the lender agreed to extend the expiration
date of the revolving credit facility to
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October 31, 1997, to increase the $12.0 million commitment by a $300,000
stand-by letter of credit, to permit borrowings of up to $2.25 million in excess
of the applicable borrowing base limitation (not to exceed the $12.0 million
revolving credit facility commitment) and to forbear from asserting is rights
with respect to the Company's non-compliance with the financial covenants as
well as the defaults under the Company's mortgage loans and equipment loans.
However, on September 12, 1997, the Company was required to request borrowings
in excess of the amended borrowing limits in order to meet payroll and other
expenses. Although the Company's lender permitted the requested borrowings, it
has not formally waived this additional default. There can be no assurance that
the lender will continue to permit borrowings under the revolving credit
facility, that the lender will agree to extend the facility beyond the October
31, 1997 expiration date or that the Company will be able to refinance or
replace the facility on acceptable terms when and as needed.
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Accordingly,
the Company is continuing to seek extended payment terms from its vendors,
delaying purchases of raw materials, instituting internal cost reduction
measures and taking other steps to conserve operating capital. As a result, the
Company's vendors may place the Company on credit hold or take other actions
against the Company, including the termination of their relationship with the
Company or the initiation of collection proceedings. See "--Dependence on Key
Vendors." In addition, the Company is actively pursuing additional sources of
working capital, which could include the issuance of debt or equity securities
or the sale of some or all of the Company's assets. However, as of the date of
this Report, the Company had received no firm commitments with respect to any
such transaction and there can be no assurance that any such transaction will be
identified. Further, there can be no assurance that the Company will be able to
obtain additional sources of additional working capital when and as needed or
that the terms of any such funding will be acceptable to the Company or in the
best long-term interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and to
extend the expiration date of, the Company's revolving credit facility, or to
otherwise obtain sufficient funds when and as needed to satisfy the Company's
working capital requirements could force the Company to curtail operations, seek
extended payment terms from its vendors or seek protection under the federal
bankruptcy laws. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
WEAKNESSES IN INTERNAL CONTROLS
In connection with the Company's audit for the fiscal year ended March 31,
1997, management determined that, during fiscal 1997, the use of certain
accounting procedures and estimates based on historical results caused an
overstatement of gross margin and inventories on an interim basis. As a result
of the overstatement, inventory and gross margin at March 31, 1997 were reduced
by approximately $4,600,000 over the prior period. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management is taking steps to improve its internal controls, including
increasing the size and capabilities of its accounting department and improving
its management information systems. However, there can be no assurance that the
Company will be able to successfully implement these steps or that the Company
will not encounter other internal control weaknesses. The failure of the
Company's accounting and finance systems to provide accurate information
necessary to monitor the Company's financial position, results of operations and
liquidity could have a material adverse
Page 11 of 41 Pages
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effect on the Company's business, financial condition and results of operation.
See "--Management Information Systems--Integrated Operations Software."
DISPUTES AND LITIGATION
The Company, Ronald S. Deans, the Company's President, Chief Executive
Officer and Chairman of its Board of Directors, and Terry A. Fife, the Company's
former Vice President of Finance and Chief Financial Officer, are named as
defendants in a securities action filed on July 17, 1997 in the U.S. District
Court for the Western District of Washington (the "Complaint"). The Complaint
was filed on behalf of a class of purchasers of the Company's Common Stock
during the period beginning on August 6, 1996 (the day the Company announced
financial results for the first quarter of its 1997 fiscal year) and ending on
June 12, 1997 (the "Class Period"). The Complaint alleges, among other things,
that, throughout the Class Period, the defendants inflated the price of the
Common Stock by intentionally or recklessly making material misrepresentations
or omissions which deceived the public about the Company's financial condition
and prospects. The Complaint alleges claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and seeks damages in an unstated amount. Two
separate but related complaints (the "Related Complaints") naming the same
defendants and alleging substantially the same claims as set forth in the
Complaint were filed in the U.S. District Court for the Western District of
Washington on July 22, 1997 and July 23, 1997. Although the Company intends to
vigorously defend the Complaint and the Related Complaints, it is unable to
predict the outcome of these actions. See "Item 3. Legal Proceedings."
The Company owns insurance policies applicable to certain losses including
costs of defense. However, if the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any claim, there is no assurance that
any or all of such liability, compromise or settlement would be covered by the
Company's insurance. If the amount of insurance is insufficient, or if the
policies are determined to be inapplicable, the Company could be required to
make a payment in the form of cash, indebtedness or equity securities. A payment
of this nature could have a negative material impact on the Company's capital
resources and issuance of additional equity securities could have a negative
material impact on the Company's existing shareholders. Moreover, the defense of
any pending or future litigation, investigation or dispute could result in
substantial legal and professional costs to the Company and could divert
management's attention from the other business affairs of the Company for
substantial periods of time.
COMPETITION
The Company believes that its product designs, product quality,
merchandising programs, distribution channels, customer service and competitive
pricing distinguishes the Company from its competitors. However, many of the
Company's competitors, particularly in the designer stationery industry, are
larger, better capitalized, more established and have substantially greater
financial, marketing and human resources. Moreover, the development and
manufacture of new designer stationeries and specialty papers are highly capital
intensive. In order to remain competitive, the Company may be required to
continue to make significant expenditures for capital equipment, sales, service,
training and support capabilities, investments in systems, procedures and
controls, expansions of operations and research and development, among many
other items. Additional financing might be required to fund the Company's
investments in those areas. There can be no assurance that additional financing
will be available on terms acceptable to the Company. See "--Competition" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation--Liquidity and Capital Resources."
The Company implemented a series of price changes with respect to its
specialty paper products in part due to pressure to remain competitive with its
larger competitors and in part to increase market share within the preprint
industry. In April and August of 1996, the Company made significant reductions
in the prices it charged to substantially all of its specialty paper customers.
While these price reductions increased the Company's market share, they had a
direct material negative impact on the Company's gross profits and gross profit
margins in fiscal 1997, when compared to prior years. Subsequent to the end of
fiscal 1997,
Page 12 of 41 Pages
<PAGE>
the Company implemented a further general reduction in the prices of
substantially all of its specialty paper products.
In response to the reduced gross profits and gross profit margins in fiscal
1997, the Company implemented a general price increase on its specialty paper
products, which took effect on August 1, 1997. The Company may determine that
future price increases are necessary in order to offset increases of the costs
of raw materials, direct labor, production overhead or other components of the
Company's product costs and to improve or maintain gross profit margins. There
can be no assurance that the August 1, 1997 price increase or any future price
increases will be successfully implemented. The Company operates in a highly
competitive environment and even if price increases are successfully
implemented, there can be no assurance that the Company will be able to
successfully continue to compete against its competitors at the new, higher
price levels. Either the failure to successfully implement price increases, or
the reduced competitive position once a price increase is successfully
implemented, could have material adverse effect on the Company's business,
financial condition or results of operations.
CUSTOMER CONCENTRATIONS
The Company's three largest customers, Office Depot Inc., Office Max, Inc.
and Business Depot, Inc., in the aggregate accounted for approximately 77% and
67% of the Company's total sales for fiscal 1996 and fiscal 1997, respectively.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of a limited number of customers. See "--Business Concentrations." Although the
composition of the group comprising the Company's largest customers may vary
from period to period, the loss of a significant customer or any reduction in
orders by any significant customer, including reductions due to market, economic
or competitive conditions in the designer stationery or specialty papers
industry, would have a material adverse effect on the Company's business,
financial condition and results of operations.
As a result of the concentration occurring in the office supply industry in
which the major office megastores are accounting for a greater percentage of
industry-wide sales, it is anticipated that an increasing number of the smaller
outlets and retail stores will discontinue operations in the years ahead. While
the Company anticipates that certain of such sales will be transferred to the
larger megastores to which the Company currently supplies its products, there
can be no assurance that any loss of sales to smaller outlets and retail stores
will be replaced in this manner.
DEPENDENCE ON KEY VENDORS
The Company's success depends in large part on reliable and uninterrupted
supply of raw materials from its major vendors. Although the Company purchases
goods from approximately 1,100 vendors, it generally practices a "sole source"
approach to vendor selection in that it typically relies on a single vendor for
all purchases on its various categories of production materials, and other major
categories of purchased goods and services. One key vendor of commodity paper
and other raw materials and supplies is Unisource, a broker/vendor who
represented 48% of the Company's total purchases during the fiscal 1997.
Unisource has provided the Company an immediately available and uninterrupted
supply of paper. In addition, Unisource and other key vendors have granted the
Company significant amounts of trade credit, along with favorable pricing and
payment terms. Although the Company may be able to find other sources of supply
for commodity paper and other major raw material categories, there can be no
assurance that potential new vendors, once sourced, would provide an
uninterrupted supply of raw materials or adequate levels of trade credit,
competitive prices or acceptable payment terms.
Page 13 of 41 Pages
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MAINTENANCE OF LARGE INVENTORY OF PRODUCTS
As of March 31, 1997, the Company maintained an inventory of lettering,
signage and specialty papers of $9,457,874. While the Company believes that the
maintenance of an extensive inventory affords the Company substantial
flexibility in responding to incoming orders, enhances its reputation as a major
supplier in the industry and offers certain economies of scale in its purchasing
program, the maintenance of an extensive inventory requires a substantial outlay
of funds which may not be recovered for extended periods of time. In addition,
the Company has generally observed that raw materials prices change more rapidly
than pricing for the Company's products. Consequently, the Company may be
required to absorb price increases on raw materials before it is able to pass
through such increases to its customer base. Also, to the extent that purchasing
preferences of the Company's customers change over time, such inventory may
become less marketable, which may require the Company to dispose of such
inventory on an unprofitable basis. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Result of Operations." If the Company were
unable to recover a substantial portion of its investment in inventory, this
would result in a material adverse effect on the Company's business, financial
condition and results of operations.
IMPLEMENTATION OF AUTOMATED PRODUCTION EQUIPMENT
The efficient manufacture of designer stationeries and specialty papers is
highly capital intensive. In order to remain competitive, the Company invested
significant financial and operating resources in the purchase and implementation
of automated production equipment over the course of fiscal 1996 and 1997,
including two high speed, automated printing presses and one high speed
automated packaging production line, among other equipment. The Company also
invested significant financial and operational resources in the form of
dedicated employees and outside consultants in the design, site preparation,
installation and ongoing refinement of these systems. However, the planned
efficiency improvements from these investments were not realized during fiscal
1997 due to significant delays and extra expenses incurred during the
implementation of this production machinery. There can be no assurance that the
machinery will be fully and successfully implemented and perform at the minimum
level required to deliver the efficiencies expected when the machinery was
purchased, or that the Company will be successful in its future plans for
implementing any new production machinery that it may require, either of which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
MANAGEMENT INFORMATION SYSTEMS
Over the course of fiscal 1996 and fiscal 1997, the Company invested
significant financial and operational resources in the installation of
integrated hardware and software systems designed to integrate all major aspects
of the Company's business including sales, electronic data interchange (EDI),
warehousing, manufacturing, distribution, purchasing, inventory control,
merchandise planning and replenishment, and various financial systems. The
Company also invested significant financial resources in outside consultants for
the design, installation and ongoing refinement of this system. In fiscal 1998,
the Company determined the need to replace this system and therefore elected to
write-off effectively all of its investment in the system software, consulting
fees and certain other implementation expenditures through March 31, 1997. The
Company has determined that it will need to invest further significant resources
to implement a new system of integrated hardware and software over the course of
fiscal 1998 and possibly future periods. There can be no assurance that the
current package will perform at the minimum level required to adequately support
the operations of the Company until implementation of a new system is completed,
or that the Company will be successful in its future plans for implementing a
new system, either of which could have a material adverse effect on the
Company's business, financial condition or results of operations.
Page 14 of 41 Pages
<PAGE>
ELECTRONIC DATA INTERCHANGE
The Company currently utilizes electronic data interchange ("EDI") to
transact business with its largest customers. Presently approximately 70% to 80%
of customer orders and invoices are transacted by EDI. The Company believes that
its current systems may not be adequate to support the Company's future EDI
requirements. In addition, the Company is highly dependent on a single
consultant to support its current method of processing EDI transactions. The
Company has determined that it may be necessary to find or develop in-house EDI
expertise and implement new EDI systems to ensure reliable transactions, minimum
acceptable customer service, sufficient operational efficiency, and to provide
management with the ability to monitor critical performance factors with major
customers. There can be no assurance that the current methods and consultants
used by the Company to transact EDI will perform at the minimum level required
to adequately support the operations of the Company, or that the Company will be
successful in its future plans for implementing new EDI personnel and software,
either of which could have a material adverse effect on the Company's business,
financial condition or results of operations.
COLLECTION OF ACCOUNTS RECEIVABLE
Difficulties encountered by the Company in fiscal 1997 in connection with
the installation and implementation of its new EDI software package resulted in
significant delays in the required electronic delivery of invoices to certain
key customers. These delays resulted in significant corresponding delays in the
collection of accounts receivable during the third and fourth quarters of fiscal
1997 which contributed to a substantial increase in the Company's trade
receivables balance and negative operating cash flow at the end of fiscal 1997.
While the Company continues to work to improve its ability to reliably invoice
via EDI, there can be no assurance that the Company will be successful in
adequately improving its collection of accounts receivable in the foreseeable
future. Continued invoicing or collection difficulties could have a material
adverse effect on the Company's business, financial conditions or results of
operations. See
"--Management Information Systems--Electronic Data Interchange."
DEPENDENCE ON KEY PERSONNEL
At the present time, the Company is highly dependent on the continued
services of Ronald S. Deans, Mark G. Deans and R. Scott Deans, who serve as the
Company's principal executive officers as well as directors of the Company.
There can be no assurances that the Company will be able to replace any of these
key executives in the event their services become unavailable. The loss of
Ronald S. Deans, the Company's President and Chief Executive Officer, Chief
Financial Officer and Secretary and Chairman of the Company's Board of
Directors, or the other key members of the Company's management team could have
a material adverse effect on the Company's business, financial condition or
results of operations.
IMPACT OF COLLECTIVE BARGAINING AGREEMENT
During the second quarter of fiscal 1998, a group of the Company's employees
successfully petitioned for an election to determine if they would be
represented by a union, and an election date was set for October 2, 1997. If a
majority of the Company's employees elect to join the union, the Company will be
required to engage in good faith negotiations with the union for a collective
bargaining agreement. The Company cannot predict the outcome of the election by
its employees or the results of the negotiations of, or the terms of, the
collective bargaining agreement. The terms of any such collective bargaining
agreement could result in an increase in overall costs of production. In
addition, depending on the position taken by the union in its negotiations with
the Company, there could be an increased risk of labor strikes or work
stoppages. Any of these factors could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"--Employees."
Page 15 of 41 Pages
<PAGE>
TECHNOLOGY CHANGES AFFECTING PRODUCTS
The design and manufacture of production equipment used in the designer
stationery and specialties paper industries has undergone and continues to
undergo rapid and significant technological change. In particular, developments
in the software industry may afford customers and consumers with the ability to
produce paper products which offer quality characteristics comparable with that
provided by the Company. Any such developments may, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's business is, to a significant degree,
dependent on the enhancement of its current products and development of new
products. Product development and enhancement involve substantial expenditures
and a high degree of risks, and there is no assurance that product development
efforts of the Company will be successful, will have sufficient utility or will
be superior to efforts by others, including current customers and consumers of
the Company's products. There can be no assurances that future technological
developments will not render existing or proposed products of the Company
uneconomical or obsolete, or that the Company will not be adversely affected by
the future development of commercially viable products by others. The
development of superior products by others could have a material adverse effect
on the Company's business, financial condition or results of operations.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company owns a number of trademarks and copyrights, and certain of the
Company's proprietary manufacturing processes are protected by trade secrets.
There can be no assurance that the Company's trade secrets, trademarks,
copyrights or other proprietary rights will be effective in discouraging
competition or held valid if subsequently challenged, or that others will not
assert rights in, or ownership of, any of such proprietary rights. In addition,
there can be no assurance that the actions taken by the Company to protect its
proprietary rights will be adequate to prevent imitation of its products, that
the Company's proprietary information will not become known to competitors or
that others will not independently develop products substantially equivalent or
superior to the Company's products without infringing on the Company's
proprietary rights. There can be no assurance that any pending trademark
application will result in the issuance or a registered trademark. In addition,
the laws of certain foreign countries do not protect proprietary rights to the
same extent as do the laws of the United States. While the Company has made
reasonable efforts to protect all of its trade secrets, trademarks, copyrights
and other proprietary rights, to the extent such protections are inadequate, the
Company could lose a part or all of these rights which, in turn, could have a
material adverse effect on the Company's business, financial condition or
results of operations.
CHANGING CONSUMER PREFERENCES AND INTERESTS
The success of the Company's business depends to a significant extent on
consumer preferences and spending habits. Consumer preferences are influenced by
a number of factors, including general economic conditions affecting disposable
consumer income, such as employment, business conditions, interest rates and
taxation. Any significant decline in such general economic conditions or
uncertainties regarding future economic prospects that adversely affect
discretionary consumer spending generally could have a material adverse effect
on the Company's business, prospects, financial condition or results of
operations. Moreover, while the Company believes that its designs,
configurations and related artwork have received substantial acceptance by its
targeted market, there can be no assurances that consumers and other purchasers
of these materials will continue to favor the Company's products in light of the
constant shifting that occurs with regard to consumer preferences and interests.
INTERNATIONAL SUBSIDIARIES
The Company has made substantial efforts to increase its product line sales
to international markets during fiscal 1996 and 1997. The Company has
established three wholly-owned foreign subsidiaries to
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conduct business outside the United States. Acquisition, start-up and
organizational costs during fiscal 1996 and fiscal 1997 were significant for
these foreign subsidiaries, as was the commitment of executive management time,
attention and effort. Though the Company derives a significant percentage of its
total sales from these subsidiaries, collectively they generated net losses and
negative cash flows on a consolidated basis in fiscal 1997. There can be no
assurances that the results of these operations, individually or collectively,
will yield either net profits or positive cash flows in the foreseeable future.
Additional cash infusions may be necessary in the future to support these
subsidiaries, along with continued significant effort from the Company's
executive management team. As a result, the operations and requirements of the
Company's foreign subsidiaries may have material adverse effect on the Company's
business, financial condition and results of operations.
FOREIGN EXCHANGE AND INTERNATIONAL TRADE
International sales accounted for approximately 22% of the Company's total
net sales in fiscal 1997. See "Sales/Assets by Geographic Location." As a result
of such international sales, a significant portion of the Company's revenues
will be subject to certain risks, including unexpected changes in regulatory
requirements, exchange rates, tariffs and various other import or export trade
barriers, political and economic instability, difficulties in receivable
collections, difficulties in staffing and managing foreign subsidiary and branch
operations and potentially adverse tax consequences. The Company is also subject
to the risks associated with the imposition of legislation and regulations
relating to the import or export of stationeries, specialty papers and office
supply products. The Company cannot predict whether quotas, duties, taxes or
other charges or restrictions will be implemented by the United States, Canada,
Australia or any other country upon the importation or exportation of the
Company's products in the future. There can be no assurance that any of these
factors or adoption of restrictive policies will not have a material adverse
effect on the Company's business, financial condition or results of operations.
POSSIBLE FAILURE TO QUALIFY FOR NASDAQ NATIONAL MARKET OR NASDAQ SMALLCAP MARKET
In July 1997, Nasdaq informed the Company that its Common Stock and warrants
would be delisted from the Nasdaq National Market as a result of the Company's
failure to file this Report with the Securities and Exchange Commission by the
due date. Nasdaq has granted continued listing for the Company's Common Stock
and warrants provided the Company files this Report and its Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 by no later than September
18, 1997. The Company has been informed by Nasdaq that the letter "E" that has
been added to the trading symbols for the Company's securities will be removed
once these conditions have been satisfied. Although the Company expects that
these conditions will be satisfied, there can be no assurance that the Company
will continue to be able to satisfy the other requirements for continued listing
on Nasdaq or that, if necessary, it will be able to satisfy the listing
requirements of the Nasdaq Small Cap Market. If the Company is unable to satisfy
these listing requirements, trading, if any, in the Common Stock would
thereafter be conducted in the over-the-counter market, in which case an
investor may find it difficult to dispose of, or to obtain accurate quotations
as to the market value, of the Common Stock. This would have a material adverse
impact on the trading market and market price for the Common Stock.
POSSIBLE APPLICABILITY OF RULES RELATING TO LOW-PRICED STOCK
The Securities and Exchange Commission has adopted regulations which
generally define a "penny stock" to be any equity security that has a market
price (as defined) of less than $5 per share, subject to certain exceptions.
Unless the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, it may be deemed to be "penny stock" and thus will become
subject to rules that impose additional sales practice requirements on
broker/dealers who sell such securities to persons other than established
customers and accredited investors. These rules could adversely effect the
ability and willingness of broker-dealers to sell the Common Stock, which could
reduce the liquidity of the Common Stock and have a material adverse effect on
the trading market and the market price for the Common Stock.
Page 17 of 41 Pages
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There can be no assurance that the Common Stock will continue to be listed on
the Nasdaq National Market or, if necessary, that the Common Stock will qualify
for listing on the Nasdaq Small Cap Market. See "--Possible Failure to Qualify
for Nasdaq National Market or Nasdaq SmallCap Market."
EXISTENCE OF WARRANTS AND OPTIONS AND POSSIBLE DILUTION
As of September 8, 1997, there were outstanding warrants for the purchase of
an aggregate of 1,342,293 shares of Common Stock at an exercise price of $.77 to
$6.50 per share. In addition, as of September 8, 1997, there were outstanding
options granted under the Company's stock option plan to purchase up to 173,500
shares of Common Stock at exercise prices ranging from Cdn. $1.00 to Cdn. $4.15
per share. In the event that the outstanding warrants and options are exercised,
the holders will be given the opportunity to profit from a rise in the market
price of the underlying shares. This may have certain dilutive effects on, and a
materially depressive effect on, the market price for the Common Stock. The
terms on which the Company could obtain additional capital during the life of
such warrants and options may be adversely affected because the holders may be
expected to exercise them at a time when the Company might otherwise be able to
obtain comparable additional capital in a new offering of securities at a price
per share greater than the exercise price of such options and warrants. As a
result, the existence and possible exercise of such options or warrants could
have a material adverse effect on the Company's ability to raise capital through
the sale of its equity securities.
FLUCTUATIONS OF QUARTERLY RESULTS; SEASONALITY
Management expects that the Company's financial results may vary materially
from period to period. Most of the Company's customers order products for
immediate delivery. As a result, a substantial amount of the Company's net sales
in each quarter results from orders received in that quarter. The Company's net
sales and operating results may, therefore, vary significantly as a result of,
among other things, volume and timing of orders received during the quarter,
variations and sales mix, and delays in production schedules. Accordingly, the
Company's historical financial performance is not necessarily a meaningful
indicator of future results. Moreover, a significant portion of the Company's
customer orders are placed between August and October of each year in
anticipation for shipment during the Company's third fiscal quarter (i.e., the
Christmas period). As a result, the Company has experienced and is expected to
continue to experience seasonal fluctuations in its operating results based on
such purchasing patterns. See "--Seasonality." These fluctuations in quarterly
operating results could have a material adverse effect on, among other things,
the market price for the Company's Common Stock.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been, and is likely to continue to
be, volatile. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters." The market price of the Common Stock could fluctuate,
perhaps substantially, in response to a number of factors, such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers or suppliers, changes in the general condition of, or trends in,
the designer stationery and specialty paper industry, paper prices, changes in
governmental regulations, or changes in securities analysts' estimates of the
Company's or its competitors' or industry's, future performance. In addition, in
recent years the stock market in general, and the market for shares of small
capitalization stocks in particular, including the Company's, have experienced
extreme price and volume volatility, which has had a substantial effect on the
market prices of securities of many smaller public companies for reasons
frequently unrelated to the operating performance of such companies. These broad
market fluctuations may have a material adverse effect on the market price of
the Common Stock.
Page 18 of 41 Pages
<PAGE>
YEAR 2000 ISSUES
The Company has not yet made an assessment of the impact of the year 2000
problem on its computer software, hardware and other systems, including those of
vendors, customers and other third parties. The potential expense to ensure that
all of the computer and other systems are year 2000 compliant cannot be
determined until such an assessment is made. However, the cost of becoming year
2000 compliant, or the consequences for failure to become year 2000 compliant,
could have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company considers its properties to be suitable and adequate for their
intended uses for the foreseeable future. These properties consist of the
following:
EXECUTIVE OFFICES AND DOMESTIC FACILITIES
The Company's headquarters and manufacturing facility in Blaine, Washington
has approximately 96,500 square feet of office, warehouse and manufacturing
space located on ten and one-half acres of Company-owned land. The Company's
Blaine, Washington facility was increased from 34,000 sq. ft to 49,000 sq. ft in
December 1994. The facility was increased to its current size during fiscal year
1996.
OTHER WHATCOM COUNTY FACILITIES
The Company leases a 19,050 sq. ft. facility in Bellingham, Washington. This
facility is used in warehousing and shipping functions. The lease payments are
$7,620 per month, triple net. The lease expires in October 1998, and the Company
has an option to renew for another three year term. During 1996 and 1997, the
Company also leased 4 additional 10,000 sq. ft. buildings at a business park
facility near Ferndale, Washington, each facility on a renewable six month lease
of $15,000 per month, triple net.
EUROPEAN FACILITIES
In connection with the distribution of the Company's products in Europe,
Geographics--Europe leases 6,700 square feet of warehouse space near London,
England. The lease requires quarterly lease payments of approximately $5,200,
triple net, and expires on February 14, 2006.
AUSTRALIAN FACILITIES
In connection with the distribution of the Company's products in Australia,
Geographics--Australia leases 5,000 square feet of warehouse space near
Brisbane, Australia. The lease requires lease payments of $3,400 per month,
triple net (with annual review of the rental rate beginning in August 1997), and
expires on August 31, 1999.
ITEM 3. LEGAL PROCEEDINGS
The Company, Ronald S. Deans, the Company's President, Chief Executive
Officer and Chairman of its Board of Directors, and Terry A. Fife, the Company's
former Vice President of Finance and Chief Financial Officer, are named as
defendants in a securities action filed on July 17, 1997 in the U.S. District
Court for the Western District of Washington (the "Complaint"). The Complaint
was filed on behalf of a class of purchasers of the Company's Common Stock
during the period beginning on August 6, 1996 (the day the Company announced
financial results for the first quarter of its 1997 fiscal year) and ending on
June 12, 1997 (the "Class Period"). The Complaint alleges, among other things,
that, throughout the Class Period, the defendants inflated the price of the
Common Stock by intentionally or recklessly making material misrepresentations
or omissions which deceived the public about the Company's financial condition
and prospects. The Complaint alleges claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and seeks damages in an unstated amount. Two
separate but related complaints (the
Page 19 of 41 Pages
<PAGE>
"Related Complaints") naming the same defendants and alleging substantially the
same claims as set forth in the Complaint were filed in the U.S. District Court
for the Western District of Washington on July 22, 1997 and July 23, 1997.
Although the Company intends to vigorously defend the Complaint and the Related
Complaints, it is unable to predict the outcome of these actions. See "--Risk
Factors--Disputes and Litigation."
The Company owns insurance policies applicable to certain losses including
costs of defense. However, if the Company is determined to be liable for, or
otherwise agrees to settle or compromise, any claim, there is no assurance that
any or all of such liability, compromise or settlement would be covered by the
Company's insurance. If the amount of insurance is insufficient, or if the
policies are determined to be inapplicable, the Company could be required to
make a payment in the form of cash, indebtedness or equity securities. A payment
of this nature could have a negative material impact on the Company's capital
resources and issuance of additional equity securities could have a negative
material impact on the Company's existing shareholders. Moreover, the defense of
any pending or future litigation, investigation or dispute could result in
substantial legal and professional costs to the Company and could divert
management's attention from the other business affairs of the Company for
substantial periods of time.
The Company is also party to other routine litigation incident to its
business and to which its property is subject. The Company's management believes
that the ultimate resolution of these matters will not have a material adverse
effect on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading on the Nasdaq National Market under
the symbol "GGIT" on March 8, 1996. From May 5, 1995 to March 7, 1996 the
Company's Common Stock traded on the OTC Bulletin Board. The Company's Common
Stock also trades on the Toronto Stock Exchange under the symbol "GGI".
In July 1997, Nasdaq informed the Company that its Common Stock and warrants
would be delisted from the Nasdaq National Market as a result of the Company's
failure to file this Report with the Securities and Exchange Commission by the
due date. Nasdaq has granted continued listing for the Company's Common Stock
and warrants provided the Company files this Report and its Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 1997 by no later than September
18, 1997. The Company has been informed by Nasdaq that the letter "E" that has
been added to the trading symbols for the Company's securities will be removed
once these conditions have been satisfied. Although the Company expects that
these conditions will be satisfied, there can be no assurance that the Company
will continue to be able to satisfy the other requirements for continued listing
on the Nasdaq National Market. Delisting of the Company's securities from the
Nasdaq National Market could have a material adverse effect on the liquidity and
trading price of the Common Stock. See "Item 1. Business--Risk Factors--
Possible Failure to Qualify for Nasdaq National Market or Nasdaq Smallcap
Market."
Page 20 of 41 Pages
<PAGE>
The following table sets forth the high and low closing bid prices or
closing sales prices, as the case may be, of the Common Stock, as reported on
the OTC Bulletin Board or the Nasdaq National Market System, as the case may be,
for each fiscal quarter beginning with the first fiscal quarter of the fiscal
year ended March 31, 1996.
NASDAQ NMS/OTC BULLETIN BOARD
<TABLE>
<CAPTION>
1996 HIGH LOW
- ------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter...................................................... $ 1.88 $ 1.13
Second Quarter..................................................... $ 3.44 $ 1.45
Third Quarter...................................................... $ 5.38 $ 3.00
Fourth Quarter(1).................................................. $ 6.25 $ 4.50
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter...................................................... $ 6.94 $ 4.75
Second Quarter..................................................... $ 5.69 $ 2.88
Third Quarter...................................................... $ 5.38 $ 2.75
Fourth Quarter..................................................... $ 5.25 $ 3.25
</TABLE>
- ------------------------
(1) The Company's shares began trading on the Nasdaq National Market System
effective March 8, 1996.
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. As
of September 8, 1997, there were approximately 268 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company has not paid dividends at any time during the two fiscal year
period ending on March 31, 1997. The Company anticipates that any future
earnings will be retained for investment in its business. Any payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's earnings,
financial condition, capital requirements, extent of indebtedness and
contractual restrictions with respect to the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
In May 1996, the Company completed a private placement of 1,268,293 units at
a price of $5.125 per unit. Each unit consisted of one share of Common Stock and
a warrant to purchase one share of Common Stock at a purchase price of $4.25.
The warrants were immediately exercisable and expire on June 1, 1999. The
Company received approximately $6.1 million in net proceeds from the sale of the
units. The offering of the units was made to certain accredited investors in
reliance on Section 4(2) of the Securities Act of 1933 (the "Securities Act") as
an offer and sale of securities not involving a public offering. Purchasers of
the units entered into a registration rights agreement with the Company (the
"Registration Rights Agreement") pursuant to which the Company has agreed,
subject to certain conditions, to register the Common Stock and warrants
comprising the units and the Common Stock issued or issuable upon exercise of
such warrants (the "Registrable Securities"). Pursuant to the Registration
Rights Agreement, the Company has filed a registration statement with the
Securities and Exchange Commission (SEC File No. 333-10051) to register under
the Securities Act the public offer and sale of the Registrable Securities.
In July 1996, the Company purchased substantially all of the assets of
Grahams Graphics Pty. Ltd. (the "Seller"). The purchase price consisted of (i)
the issuance to the Seller of 50,000 shares of Common Stock (valued at an
aggregate of $200,000 based on the then-prevailing market price for the Common
Stock); (ii) the issuance to the Seller of options to purchase an additional
50,000 shares of Common Stock at an exercise price of $4.00 per share; (iii) the
assumption of approximately $150,000 in unsecured trade liabilities; and (iv) a
one time cash payment of $40,000. Upon the completion of the transaction, the
Page 21 of 41 Pages
<PAGE>
acquired assets and liabilities were contributed to, or assumed by, Geographics
Australia Pty. Ltd., a wholly-owned subsidiary of the Company. The issuance of
the Common Stock and the stock options in connection with this transaction were
made in reliance on Section 4(2) of the Securities Act as an offer and sale of
securities not involving a public offering.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are derived from the
Company's Consolidated Financial Statements for the periods indicated. The
information set forth below should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's 1997 Consolidated Financial Statements and notes
thereto contained elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------
1993(1) 1994 1995 1996(2) 1997
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................. $5,375,595 $ 6,901,845 $10,186,136 $22,613,635 $23,840,506
Cost of sales..................................... 3,035,862 4,488,176 5,881,649 14,194,505 20,378,594
---------- ----------- ----------- ----------- -----------
Gross margin...................................... 2,339,733 2,413,669 4,304,487 8,419,130 3,461,912
Selling, general and administrative............... 1,842,030 2,981,861 2,873,476 5,734,901 9,723,210
Amortization of goodwill.......................... -- 479,300 639,067 159,768 --
---------- ----------- ----------- ----------- -----------
Income (loss) from operations................... 497,703 (1,047,492) 791,944 2,524,461 (6,261,298)
Other income...................................... 88,532 209,521 15,398 130,684 24,907
Gain (loss) on sales of property and equipment.... 80,194 (12,687) (13,468) (594) (86,048)
Reserve for impairment on EDP
installation-in-progress........................ -- -- -- -- (620.759)
Interest expense.................................. (257,287) (356,060) (457,499) (787,848) (1,063,075)
---------- ----------- ----------- ----------- -----------
Income (loss) before provision for income taxes... 409,142 (1,206,718) 336,375 1,866,703 (8,006,273)
Income tax provision (benefit).................... 140,053 34,800 (411,367) 634,679 (55,972)
---------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ 269,089 $(1,241,518) $ 747,742 $ 1,232,024 $(7,950,301)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Net income (loss)
per average common share outstanding............ $ 0.07 $ (0.28) $ 0.16 $ 0.19 $ (0.85)
Weighted average shares outstanding
used in computing per share data................ 4,231,729 4,424,535 4,549,101 6,606,499 9,322,278
SUPPLEMENTAL OPERATING DATA:
EBITDA(3)....................................... $ 891,326 $ (111,226) $ 2,087,206 $ 3,649,460 $(4,889,006)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------------------------------------------------
1993(1) 1994 1995 1996(2) 1997(3)
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $1,998,656 $ 869,651 $ 1,836,436 $ 5,886,703 $ 401,550
Total assets...................................... 5,358,937 6,788,067 10,614,673 24,738,041 30,245,701
Long-term obligations, less current portion....... 1,510,554 2,484,634 3,319,948 3,690,360 4,322,371
Stockholders' equity.............................. 2,518,695 1,471,514 2,803,341 9,989,852 7,917,023
</TABLE>
- ------------------------
(1) As presented, the financial results for the fiscal year ended March 31, 1993
have been restated to reflect adjustments to the carrying value of product
display racks, inventory and investments in partnerships.
(2) Certain amounts for the fiscal year ended March 31, 1996 have been
reclassified to conform to the current year presentation of the fiscal year
ended March 31, 1997 amounts. Such reclassifications had no effect on
previously reported earnings or financial position.
(3) As used herein, "EBITDA" is defined as operating income plus depreciation
and amortization. EBITDA is commonly used to assess the non-cash effect on
earnings of generally high levels of both amortization and depreciation
expenses associated with capital equipment and acquisitions. EBITDA does not
purport to represent cash provided by operating activities as reflected in
the Company's consolidated statements of cash flow, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
Page 22 of 41 Pages
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the Notes thereto appearing elsewhere on
this Report.
OVERVIEW
Geographics, Inc. was incorporated as a Wyoming corporation on September 20,
1974. From its inception until fiscal 1991, the Company was engaged exclusively
in the manufacture and wholesale marketing of various rub-on and stick-on
lettering, stencils, graphics arts products and other signage products. In 1991,
the Company began the development of "pre-print" or "specialty" paper products
consisting of paper on which photographs or other art images are printed and
which is then cut to size. In 1992, the Company introduced its first specialty
paper product under the Geopaper brand name. The Company now has several
specialty paper products made using Geopaper designs, including stationery,
business cards, brochures, memo pads and paper cubes, which, in North America,
are sold primarily to office supply superstores and mass market retailers, and
which are also distributed internationally through the Company's subsidiaries in
Canada, Europe and Australia. The specialty papers group now constitutes the
Company's principal business, with approximately 71% of the Company's total
sales in fiscal 1997 attributable to sales of Geopaper products. Primarily as a
result of sales generated by the specialty papers group, the Company has
experienced substantial growth, with total sales increasing from $6,900,875 for
fiscal 1994 to $23,840,506 for fiscal 1997, an increase of 245%.
Primarily to develop its specialty papers group, the Company has made
substantial investments to expand its facilities, purchase and install automated
production equipment and an integrated management information system and enhance
administrative and other infrastructure systems. The Company has experienced
delays, set-backs and unanticipated additional expenses in the installation of
the production equipment and the management information system. Moreover, the
management information system has failed to perform as promised by vendors. As a
result, the Company has not yet realized the originally anticipated economic
benefits and efficiencies from these capital expenditures. See "Item 1.
Business-- Management Information System--Operations Software," "Item 1.
Business--Management Information Systems--Electronic Data Interchange (EDI)" and
"Item 1. Business--Risk Factors--Implementation of Automated Production
Equipment." These unanticipated expenses and operational inefficiencies,
together with price reductions for the Company's products and cost increases for
certain raw materials, have had a negative impact on the Company's gross margins
and contributed to a substantial net loss for fiscal 1997. In addition, since
May 1997, the Company has been in default of several financial covenants under
its revolving credit facility, the Company's primary source of working capital,
and borrowings under the facility have exceeded permitted borrowing base
limitations. The existence of these defaults constitutes a default under the
Company's mortgage loans and equipment lease facilities. The report of the
Company's auditors included in this Report states that the Company's fiscal 1997
losses and non-compliance with covenants under its revolving credit facility
raise substantial doubt about the Company's ability to continue as a going
concern. See "--Liquidity and Capital Resources."
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Accordingly,
the Company is continuing to seek extended payment terms from its vendors,
delaying purchases of raw materials, instituting internal cost reduction
measures and taking other steps to conserve operating capital. As a result, the
Company's vendors may place the Company on credit hold or take other actions
against the Company, including the termination of their relationship with
Page 23 of 41 Pages
<PAGE>
the Company or the initiation of collection proceedings. See "Item 1.
Business--Risk Factors--Dependence on Key Vendors." In addition, the Company is
actively pursuing possible sources of additional capital and has engaged an
investment banker to assist in the evaluation and pursuit of financing
transactions, which could include the issuance of debt or equity securities or
the sale of all or part of the Company's assets. However, as of the date of this
Report, the Company had received no firm commitments with respect to any such
transaction and there can be no assurance that any such transaction will be
identified. Further, there can be no assurance that the Company will be able to
obtain additional sources of additional working capital when and as needed or
that the terms of any such funding will be acceptable to the Company or in the
best long-term interests of the Company's shareholders. See "Item 1. Business--
Risk Factors--Ability to Continue as a Going Concern; Defaults under Credit
Facility; Need for Additional Working Capital" and "--Liquidity and Capital
Resources."
OVERSTATEMENT OF GROSS PROFITS AND INVENTORIES. In connection with the
Company's audit for the fiscal year ended March 31, 1997, management determined
that, during 1997, the use of certain accounting procedures and estimates based
on historical results caused in an overstatement of gross margin and inventories
on an interim basis. The anticipated lower gross margin is primarily
attributable to a decline in selling prices for the Company's paper products
coupled with modest cost increases and a continuing shift in mix of sales to
lower margin products. Planned efficiency improvements in the manufacture of its
paper products were not realized during the year primarily due to delays and
extra expenses incurred during implementation of automated production machinery.
As a result, the Company experienced increases in both the direct labor and
overhead elements of its product costs. These factors caused gross profit
margins as a percentage of sales to decline significantly to 18.9% for fiscal
1997 compared to 37.2% for fiscal 1996. In addition, the Company increased its
reserve for potentially obsolete inventory by $1,190,000 with a corresponding
reduction of gross margin. Actual gross profit margins as a percentage of sales,
which reflect both additional reserves for obsolete inventory and the prior
overstatement of gross margins, were 14.5% for fiscal 1997 compared to 37.2% for
fiscal 1996.
WEAKNESSES IN INTERNAL CONTROLS. In connection with the Company's audit for
the fiscal year ended March 31, 1997, management determined that several
weaknesses in the Company's internal controls occurred during fiscal 1997.
Management is taking steps to improve its internal controls, including
increasing the size and capabilities of its accounting department and improving
its management information systems. However, there can be no assurance that the
Company will be able to implement these steps or that the Company will not
encounter other internal control weaknesses. The failure of the Company's
accounting and finance systems to provide accurate information necessary to
monitor the Company's financial position, results of operations and liquidity
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Item 1. Business--Management
Information Systems--Integrated Operations Software" and "Item 1. Business--Risk
Factors--Management Information Systems."
SEASONALITY. A significant portion of the Company's customer orders are
placed between August and October of each year for shipment during the Company's
third fiscal quarter, which includes the Christmas season, with the largest
levels of sales historically occurring in the second half of the calendar year.
As a result, the Company has experienced, and is expected to continue to
experience, seasonal fluctuations in its operating results. See "Item 1.
Business--Seasonality."
QUARTERLY FLUCTUATIONS. The Company's operating results may fluctuate
significantly from period to period as a result of a variety of factors,
including product returns, purchasing patterns of consumers, the length of the
Company's sales cycle to key customers and distributors, the timing of the
introduction of new products and product enhancements by the Company and its
competitors, technological factors, variations in sales by product and
distributions channel, and competitive pricing. Consequently, the Company's
revenues may vary significantly by quarter and the Company's operating results
may experience significant fluctuations. See "Item 1. Business--Risk
Factors--Fluctuations of Quarterly Results; Seasonality."
Page 24 of 41 Pages
<PAGE>
BACKLOG. The Company's backlog of orders as of September 8, 1997 was
$2,180,117. The Company expects to fill all of these orders during the second
quarter of 1997. The Company includes in backlog the value of all purchase
orders received from customers for product not yet shipped and invoiced. Because
the Company only recently implemented internal controls necessary to determine
backlog, the Company is unable to determine backlog at March 31, 1997 or at the
end of any prior period. The Company's backlog is subject to fluctuations as a
result of seasonality in the Company's business and other factors and is,
therefore, not necessarily indicative of future sales. There can be no assurance
that current backlog will necessarily lead to sales in any future period. The
Company's inability to ship product with respect to a purchase order could
result in cancellation of such purchase order and reduction of backlog and could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Item 1. Business--Backlog."
COLLECTIONS OF ACCOUNTS RECEIVABLE. Difficulties encountered by the Company
in fiscal 1997 in connection with the installation and implementation of a new
EDI software package resulted in significant delays in the required electronic
delivery of invoices to certain key customers. These delays resulted in
significant corresponding delays in the collection of accounts receivable during
the third and fourth quarters of fiscal 1997 which contributed to a substantial
increase in the Company's trade receivables balance and negative operating cash
flow at the end of fiscal 1997. While the Company continues to work to improve
its ability to reliably invoice via EDI, there can be no assurance that the
Company will be successful in adequately improving its collection of accounts
receivable in the foreseeable future. Continued invoicing or collection
difficulties could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Item 1. Business--Management
Information Systems-- Electronic Data Interchange" and "Item 1. Business--Risk
Factors--Electronic Data Interchange."
MAINTENANCE OF LARGE INVENTORY. As of March 31, 1997, the Company
maintained an inventory of lettering, signage and specialty papers of
$9,457,874. While the Company believes that the maintenance of an extensive
inventory provides it substantial flexibility in responding to incoming orders,
enhances its reputation as a major supplier in the industry and offers certain
economies of scale in its purchasing program, the maintenance of an extensive
inventory requires a substantial outlay of funds which may not be recovered for
extended periods of time. In addition, the Company has generally observed that
raw materials prices change more rapidly than the pricing for the Company's
products. Consequently, the Company may be required to absorb price increases on
raw materials before it is able to pass through such increases to its customer
base. Also, to the extent that purchasing preferences of the Company's customers
change over time, the Company's inventory may become less marketable, which may
require the Company to dispose of such inventory on an unprofitable basis. The
Company has addressed these problems by increasing the reserves for obsolete
inventory during fiscal 1997 from $100,000 to $1,290,000. However, if the
Company were not able to recover a substantial portion of its investment in
inventory, this would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 1. Business--Risk
Factors--Maintenance of Large Inventory of Products."
Page 25 of 41 Pages
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentages which the items in the
Company's consolidated statements of income bear to net sales for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales...................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................. 85.5 62.8 57.7
--------- --------- ---------
Gross margin............................................... 14.5 37.2 42.3
Selling, general and administrative expenses................... 40.8 25.4 28.2
Amortization of goodwill....................................... -- .7 6.3
--------- --------- ---------
Income from operations..................................... (26.3) 11.1 7.8
--------- --------- ---------
Other income................................................... (2.8) .6 .0
Interest expense............................................... (4.5) (3.5) (4.5)
--------- --------- ---------
Other income (expense)..................................... (7.3) (2.9) (4.5)
--------- --------- ---------
Income before provision for income taxes....................... (33.6) 8.2 3.3
Income tax provision (benefit)................................. (0.2) 2.8 (4.0)
--------- --------- ---------
Net income..................................................... (33.4)% 5.4% 7.3%
--------- --------- ---------
--------- --------- ---------
</TABLE>
1997 COMPARED TO 1996
NET SALES. Net sales increased 5.4% to $23,840,506 in fiscal 1997 from
$22,613,635 in fiscal 1996. This increase was primarily attributable to the
continued growth of the Geopaper product line, which offset certain factors in
the third and fourth quarters that negatively impacted fiscal 1997 sales.
Revenue growth with respect to the Geopaper product line slowed compared to the
two prior years. While unit sales for the year ended March 31, 1997 increased by
17% compared to fiscal 1996, Geopaper revenues in fiscal 1997 were negatively
impacted by declining average selling prices, product returns, inventory
management changes by certain key customers and shipment delays associated with
inclement weather and implementation of a new computer system in the Company's
shipping department.
The Geopaper product line experienced a sales increase of 14% in fiscal 1997
to $16,900,000 compared to $14,800,000 for fiscal 1996. Geopaper sales increases
in 1997 were due primarily to sales for new store openings by Office Depot and
Office Max, and initial shipments of Geopaper products to new customers,
including Wal-Mart, Target and Kmart. In addition, Geopaper sales increased due
to the introduction of the Geoposterboard product line in over 900 Wal-Mart
stores, 500 Office Depot stores in the United States and Canada, and 80
Staples/Business Depot stores in Canada.
The shift in the Company's sales mix toward Geopaper and related products
continued in fiscal 1997. In 1997, the percentage of total Company sales
represented by Geopaper increased to 71%, compared to 65% of total sales in
fiscal 1996, while signage and lettering sales declined to 29% of total sales.
In fiscal 1996, the sales mix of Geopaper products had increased to 65% of
sales, up from 21% of sales in fiscal 1995, while lettering and signage sales
had decreased to 35% of sales from 79% of sales for the same periods.
Signage and lettering net sales for fiscal 1997 decreased 11.5% to
approximately $6,900,000 from $7,800,000 in fiscal 1996. The decline in the
sales of the signage and lettering product lines was attributable to a general
decline in the demand for products of this type and increased management
attention on the development of the specialty papers group. Management believes
that sales of signage and lettering products will continue to decline in the
future as the computerization of homes and offices will allow the efficient
production of lettering and signage products by current end-users.
Page 26 of 41 Pages
<PAGE>
GROSS MARGIN. Cost of sales includes product manufacturing costs, occupancy
and distribution costs. Gross profit as a percentage of sales decreased to 14.5%
in fiscal 1997, from 37.2% in fiscal 1996. The lower gross margin is primarily
attributable to a decline in selling prices for the Company's paper products
coupled with modest cost increases and a continuing shift in mix of sales to
lower margin products. Planned efficiency improvements in the manufacture of its
paper products were not realized during the year primarily due to delays and
extra expenses incurred during implementation of automated production machinery.
As a result, the Company experienced increases in both the direct labor and
overhead elements of its product costs. In addition, the Company increased its
reserve for potentially obsolete inventory by $1,190,000, with a corresponding
reduction of gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") are those central expenses that are incurred to
support the Company's selling, marketing and manufacturing efforts. SG&A
expenses increased to $9,723,210 (40.8% of sales) in fiscal 1997 from
$5,734,901(25.4% of sales) in fiscal 1996. This increase is primarily
attributable to the addition in fiscal 1997 of the Company's three foreign
subsidiaries in Canada, Europe and Australia. These subsidiaries accounted for
an increase in expense of $1,628,728 for fiscal 1997. The remaining increase in
SG&A expense for fiscal year 1997 was attributable to an increase in advertising
rebates and other rebates and promotions to customers, an increase in salaries
and wages of administrative and sales & marketing personnel, and an increase in
legal and settlement expenses incurred during the third quarter of fiscal 1997
relating to a settlement reached with the National Labor Relations Board.
AMORTIZATION OF GOODWILL. There was no amortization of goodwill in fiscal
1997 compared to $159,768 (0.7% of sales) in fiscal 1996. This decline was due
to the completion in fiscal 1996 of the amortization of goodwill related to the
1993 purchase of the lettering division of E-Z Industries.
INCOME/LOSS FROM OPERATIONS. The Company incurred a loss from operations in
fiscal 1997 of $6,261,298, (26.3% of sales) compared to an operating profit of
$2,524,461 (11.1% of sales) during fiscal 1996. The operating loss was the
result of significantly lower gross margins and significantly higher sales,
general and administrative expenses.
OTHER INCOME (EXPENSE). There was no other income in fiscal 1997 (0.0% of
sales) compared to $130,090 (0.6% of sales) in fiscal 1996. In previous years,
this category included such items such as management fees, foreign exchange
gains, gains on disposition of fixed assets, and other miscellaneous items.
INTEREST EXPENSE. Interest expense increased to $1,063,075 (4.5% of sales)
during fiscal 1997, compared to $787,848 (3.5% of sales) during fiscal 1996. The
higher interest costs were caused by increased borrowings to support the
Company's operating losses, the acquisition of equipment used in the manufacture
of Geopaper and facilities expansion. In addition, the Company experienced
significant delays in the required electronic delivery of invoices to certain
key customers due to problems related to the installation and implementation of
a new EDI (Electronic Data Interchange) software package. These delays in
delivery of invoices resulted in a significant corresponding delay in the
collection of accounts receivable during the third and fourth quarters of fiscal
1997. Substantial additional borrowings were necessary to support operations
during this period.
INCOME/LOSS BEFORE PROVISION FOR INCOME TAXES. The loss before provision
for income taxes was $8,006,273 (33.6% of sales) in fiscal 1997 compared to
income before provision for income taxes of $1,866,703 (8.2% of sales) in fiscal
1996. The 1997 loss before provision for income taxes was primarily the result
of the Company's operating losses, increased interest expense and reduced other
income.
INCOME TAX PROVISION (BENEFIT). In fiscal 1997, the Company recorded a
current income tax benefit of $459,972, which represents the amount of income
tax recoverable from net operating loss carry-backs. The total potential income
tax benefit for fiscal 1997, and corresponding increase in the Company's
deferred tax asset as of March 31, 1997, was an estimated $3,162,000. The total
potential deferred tax asset (before
Page 27 of 41 Pages
<PAGE>
valuation allowance) as of March 31, 1997 was $3,774,000. Based on the Company's
current operating income and available projections for operating income, the
Company determined that future operating and taxable income may not be
sufficient to fully or partially recognize the deferred tax asset of $3,774,000
at March 31, 1997. As a result, the Company decided to provide a valuation
allowance on all of its deferred tax assets at March 31, 1997. This valuation
analysis was recorded in the fourth quarter and totalled $3,774,000.
NET INCOME/LOSS. Net loss of $7,950,301 in fiscal 1997, or 33.4% of sales,
compares to net income of $1,232,024 in fiscal 1996, or 5.4% of sales.
1996 COMPARED TO 1995
NET SALES. Net sales increased 122% to $22,613,635 in fiscal 1996 from
$10,186,136 in fiscal 1995. This increase was primarily attributable to the
acceptance of the Geopaper product line. Geopaper experienced a sales increase
of 605% in fiscal 1996 to $14,800,000 compared to $2,100,000 for fiscal 1995.
Geopaper sales increases in fiscal 1996 were due to shipments of Geopaper
products to all Office Depot Inc. and OfficeMax stores in North America, as well
as shipments of Geopaper products to 248 Wal-Mart stores in March 1996.
Signage and lettering sales for fiscal 1996 decreased 4% to $7,800,000 from
$8,100,000 in fiscal 1995. The majority of the decline in signage and lettering
sales was due to the Company discontinuing the sale of science fair presentation
boards. In prior years, the Company purchased presentation boards and bundled
them with Geographics stick-on lettering products. In fiscal 1996, the Company
continued to supply the lettering products, while the Company's customers began
purchasing the presentation boards directly from the manufacturer.
The sales mix of Geopaper products increased to 65% of sales in fiscal 1996
from 21% of sales in fiscal 1995, while lettering and signage sales decreased to
35% of sales from 79% of sales for the same periods.
GROSS MARGIN. Gross margin as a percentage of sales decreased to 37.2% in
fiscal 1996, from 42.3% in fiscal 1995. The decrease in the gross margin was the
result of primarily two factors. The first factor was a change in sales mix to
products with lower gross margins. Geopaper represented 65% of sales while
lettering and signage represented 35% of sales in 1996, compared to 21% and 79%
of sales in 1995, respectively. Gross margins for Geopaper were approximately
31% while gross margins for lettering and signage were approximately 49% during
fiscal 1996. The second factor was manufacturing and labor inefficiencies
created by the Company's 122% growth rate in fiscal 1996. This rapid growth
forced the Company to substantially increase its facilities, equipment and work
force, as well as utilize leased warehouse space in order to meet the increased
sales demands.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased in
fiscal 1996 to $5,734,901 (25.4% of sales) from $2,873,476 (28.2% of sales) in
fiscal 1995. The percentage decline was due to the spreading of SG&A expenses
over significantly higher sales volumes.
AMORTIZATION OF GOODWILL. Goodwill amortization declined to $159,768 (0.7%
of sales) from $639,067 (6.3% of sales) for fiscal years 1996 and 1995
respectively. The decrease was due to the completion of the amortization of the
goodwill related to the 1993 purchase of the lettering division of E-Z
Industries. Fiscal 1996 included three months of amortization compared to twelve
months of amortization during fiscal 1995.
INCOME FROM OPERATIONS. Income from operations increased to $2,524,461
(11.1% of sales) during fiscal 1996, an increase from $791,944 (7.8% of sales)
in fiscal 1995. The improvement in income from operations was due to the
reductions in SG&A and goodwill amortization expenses as a percentage of sales,
which more than offset the decreased gross margin percentage.
Page 28 of 41 Pages
<PAGE>
OTHER INCOME. Other income was $130,090 (0.6% of sales) in fiscal 1996,
compared to $1,930 (0.0% of sales) during fiscal 1995.
INTEREST EXPENSE. Interest expense increased to $787,848 (3.5% of sales)
during fiscal 1996, compared to $457,499 (4.5% of sales) for fiscal 1995. The
acquisition of equipment used in the manufacture of Geopaper, in addition to
higher bank debt related to facilities expansion and working capital
requirements resulted in higher interest costs during fiscal 1996. The higher
interest costs were spread over a significantly higher sales volume in fiscal
1996, resulting in a decline in interest costs as a percentage of sales.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes improved to $1,866,703 (8.2% of sales) in fiscal 1996 compared to
$336,375 (3.3% of sales) in fiscal 1995. The improvement was due to the
increased income from operations noted above and the lower interest costs as a
percentage of sales previously discussed. In general, income before provision
for income taxes improved due to economies of scale available from the
significant increases in sales volumes.
INCOME TAX PROVISION/BENEFIT. The income tax provision in fiscal 1996 was
$634,679 (2.8% of sales), compared to a benefit of $411,367 (4.0% of sales) in
fiscal 1995. A tax benefit was recognized in fiscal 1995 as management
determined that future operating and taxable income was likely sufficient to
fully recognize all deferred tax assets existing at March 31, 1995. As a result,
the carrying value of the net deferred tax asset was increased and recognized as
a current (1995) period income tax benefit. This benefit was non-recurring in
nature and had no effect on fiscal 1996 results.
NET INCOME. Net income of $1,232,024 in fiscal 1996 (5.4% of sales)
compares to net income of $747,742 in fiscal 1995 (7.3% of sales). Net income as
a percentage of sales declined primarily due to the non-recurring tax benefit
discussed previously in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL OVERVIEW
As a result of the rapid growth of the Company's specialty papers group,
capital expenditures relating to the purchase and installation of an automated
production system and a management information system, operating losses and
other factors, the Company has required, and continues to require, substantial
external working capital. Moreover, subsequent to the end of fiscal 1997, the
Company has experienced working capital short-falls which have required the
Company to delay payments to certain vendors, delay purchases, institute
internal cost reduction measures and take other steps to conserve operating
capital. During fiscal 1997, operating losses totaled $6,261,298, and the
Company experienced negative operating cash flows of $6,601,926.
At the date of this Report, the Company's only available source of working
capital consisted of borrowings available under its revolving credit facility.
The revolving credit facility permits borrowings of up to $12.0 million subject
to a borrowing base limitation of 80% of the value of the Company's eligible
accounts and 55% of the value of its inventory, net of certain reserves.
Borrowings under the facility bear interest at the prime rate and are secured by
substantially all of the Company's assets. Under the terms of the facility, the
Company is required to comply with a number of financial covenants relating to,
among other things, the maintenance of minimum net worth, debt-to-equity ratios
and cash flow coverage ratios.
Since May 1997, the Company has failed to comply with the net worth,
debt-to-equity ratios and cash flow coverage ratios under the revolving credit
facility, and borrowings under the facility exceeded the permitted borrowing
base limitations. The Company's lender has also provided the Company with
several mortgage loans and equipment loans, and the existence of the defaults
under the revolving credit facility constitutes a default under these other
loans. The report of the Company's auditors included in this Report states that
the Company's fiscal 1997 losses and non-compliance with covenants under its
revolving credit facility raise substantial doubt about the Company's ability to
continue as a going concern. The Company's
Page 29 of 41 Pages
<PAGE>
1997 Consolidated Financial Statements included in this Report have been
prepared assuming that the Company will continue as a going concern and do not
include any adjustments that might result from the outcome of this uncertainty.
The Company entered into a forbearance agreement with its lender, effective
August 31, 1997, pursuant to which the lender agreed to extend the expiration
date of the revolving credit facility to October 31, 1997, to increase the $12.0
million commitment by a $300,000 stand-by letter of credit, to permit borrowings
of up to $2.25 million in excess of the applicable borrowing base limitation
(not to exceed the $12.0 million revolving credit facility commitment) and to
forbear from asserting is rights with respect to the Company's non-compliance
with the financial covenants as well as the defaults under the Company's
mortgage loans and equipment loans. However, on September 12, 1997, the Company
was required to request borrowings in excess of the amended borrowing limits in
order to meet payroll and other expenses. Although the Company's lender
permitted the requested borrowings, it has not formally waived this additional
default. There can be no assurance that the lender will continue to permit
borrowings under the revolving credit facility, that the lender will agree to
extend the facility beyond the October 31, 1997 expiration date or that the
Company will be able to refinance or replace the facility on acceptable terms
when and as needed.
The Company currently projects substantial negative cash flows from
operations for at least the remainder of fiscal 1998. The exact amount and
timing of the Company's capital requirements will be determined by numerous
factors, including the level of, and gross margin on, future sales, the outcome
of outstanding contingencies and disputes such as pending lawsuits, payment
terms obtained from the Company's vendors and the timing of capital
expenditures. However, even if the Company's lender were to formally waive all
existing defaults under the Company's revolving credit facility, the Company
expects that available borrowings under the facility would not be sufficient to
satisfy its working capital requirements beyond mid-October 1997. Accordingly,
the Company is continuing to seek extended payment terms from its vendors,
delaying purchases of raw materials, instituting internal cost reduction
measures and taking other steps to conserve operating capital. As a result, the
Company's vendors may place the Company on credit hold or take other actions
against the Company, including the termination of their relationship with the
Company or the initiation of collection proceedings. See "Item 1. Business--Risk
Factors--Dependence on Key Vendors." In addition, the Company is actively
pursuing possible sources of additional capital and has engaged an investment
banker to assist in the evaluation and pursuit of financing transactions, which
could include the issuance of debt or equity securities or the sale of all or
part of the Company's assets. However, as of the date of this Report, the
Company had received no firm commitments with respect to any such transaction
and there can be no assurance that any such transaction will be identified.
Further, there can be no assurance that the Company will be able to obtain
additional sources of additional working capital when and as needed or that the
terms of such additional funding will be acceptable to the Company or in the
best long-term interests of the Company's shareholders.
The failure to obtain an increase in borrowing availability under, and to
extend the expiration date of, the revolving credit facility, or to otherwise
obtain sufficient funds when and as needed to satisfy its working capital
requirements could force the Company to curtail operations, seek extended
payment terms from its vendors or seek protection under the federal bankruptcy
laws. See "Item 1. Business--Risk Factors--Ability to Continue as a Going
Concern; Defaults under Credit Facility; Need for Additional Working Capital."
1997 COMPARED TO 1996
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced negative
operating cash flows of $6,601,926 in fiscal 1997 and $4,931,017 in fiscal 1996.
The Company's principal cash flow requirements in fiscal 1997 were to fund
operating losses, which totaled $6,261,298, and to fund increased working
capital needs. The Company's working capital needs increased in fiscal 1997
compared to fiscal 1996 primarily as a result of an increase in trade
receivables balances. Trade receivables increased to $6,654,500 at the end of
Page 30 of 41 Pages
<PAGE>
fiscal 1997 compared to $4,974,156 at the end of fiscal 1996. This increase was
in part due to difficulties experienced in the installation and implementation
of a new electronic data interchange software package which resulted in
significant delays in the required electronic delivery of invoices to certain
key customers. These delays resulted in significant corresponding delays in the
collection of accounts receivable during the third and fourth quarters of fiscal
1997. See "Item 1. Business--Risk Factors--Electronic Data Interchange" and
"Item 1. Business--Risk Factors--Collection of Accounts Receivable."
NET CASH FLOWS FROM FINANCING ACTIVITIES. During fiscal 1997, the Company
received a net $11,273,049 from various financing sources, compared to
$8,555,704 during fiscal 1996. In fiscal 1997, the Company increased borrowings
under its revolving credit facility by $3,326,451 compared to an increase of
$3,139,463 in fiscal 1996. Proceeds from long-term debt in fiscal 1997 were
$2,333,526 compared to $1,003,029 in fiscal 1996. Repayments of long-term debt
in fiscal 1997 totaled $875,134 compared to $467,986 in fiscal 1996. The Company
received no loans from officers or directors in fiscal 1997, while in fiscal
1996 officers and directors had advanced $2,452,573 to the Company. Repayments
of notes payable to officers and directors totaled $414,710 in fiscal 1997
compared to $396,629 in fiscal 1996. In addition, the Company received proceeds
from private placements, option exercises and warrant exercises in the amount of
$6,459,945 in fiscal 1997 compared to $2,827,254 in fiscal 1996
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net
negative cash flow from investing activities for fiscal 1997 of $4,312,394,
compared to a negative cash flow from investing activities of $3,590,007 for
fiscal 1996. The Company made significant investments in fiscal 1997 to increase
the production capacity of its specialty papers group by acquiring automated
production equipment, a new management information system, warehouse racking and
delivery vehicles.
1996 COMPARED TO 1995
NET CASH FLOWS FROM OPERATING ACTIVITIES. The Company experienced negative
operating cash flows during fiscal 1996 and 1995 ($4,931,017 for fiscal 1996 and
$379,162 for fiscal 1995). Contributing to the negative cash flow from
operations was the increase in trade receivable and related party trade
receivables balances. Total trade receivables for fiscal 1996 increased 106% to
$4,974,156 compared to $2,412,324 for fiscal 1995. The increase in receivables
of 113% at year end fiscal 1996 over fiscal 1995 year end balances is consistent
with the 122% increase in sales the Company experienced during 1996.
Inventory increased to $9,139,273 at year end fiscal 1996 compared to
$2,901,155 for fiscal year end 1995, an increase of 215%. The 215% increase in
inventory is due in part to the building of North American inventories in
anticipation of higher sales levels in fiscal 1997 and the additional building
of inventories for the startup of the Company's European operations, which
require a paper size which is slightly different from the North American
standard.
NET CASH FLOWS FROM FINANCING ACTIVITIES. In fiscal 1996, the Company
received a net $8,555,704 from various financing sources, compared to $1,697,768
for the prior fiscal year. In fiscal 1996, the Company increased borrowings
under its revolving credit facility by $3,139,463, compared to $990,427 for the
prior year. Proceeds from long-term debt borrowings during fiscal 1996 were
$1,003,029, compared to $765,125 in fiscal 1995. Repayments of long-term debt in
fiscal 1996 were $467,986 compared to $232,685 in fiscal 1995. The Company
received $2,452,573 from officers and directors in the form of notes during
fiscal 1996, while $22,746 was received from officers and directors in fiscal
year 1995. Repayments of notes payable to officers and directors were $398,629
in fiscal 1996 compared to $134,888 in fiscal 1995. In addition the Company
received proceeds from private placements, option exercises and warrant
exercises in the amount of $2,827,254 in fiscal 1996, compared to $287,043 in
fiscal year 1995. The proceeds received from the above debt and equity
financings were primarily utilized to finance working capital requirements,
building expansion and equipment acquisitions related to the increased sales of
the Geopaper program.
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<PAGE>
NET CASH FLOWS FROM INVESTING ACTIVITIES. The Company experienced a net
negative cash flow from investing activities for fiscal 1996 of $3,590,007,
compared to a negative cash flow from investing activities of $1,303,258 for
fiscal 1995. During fiscal 1996, the Company made significant investments to
increase its Geopaper production capacity by acquiring printing presses, paper
cutting equipment, packaging equipment, computers, trucks and warehouse racking.
ITEM 8. FINANCIAL STATEMENTS
The following consolidated financial statements of Geographics, Inc. are
incorporated into this Item 8 by reference to another section of this Report as
follows:
<TABLE>
<CAPTION>
(a) Report of Moss Adams LLP regarding Financial Statements.......................... F-2
<S> <C> <C>
(b) Consolidated Balance Sheets as of March 31, 1997 and 1996........................ F-3
(c) Consolidated Statements of Income for the years ended March 31, 1997, 1996 and
1995............................................................................ F-4
(d) Consolidated Statements of Stockholders' Equity for the years ended March 31,
1997, 1996 and 1995............................................................. F-5
(e) Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996
and 1995........................................................................ F-6
(f) Notes to Consolidated Financial Statements....................................... F-7
(g) Report of Moss Adams LLP regarding Schedule II--Valuation and Qualifying
Accounts........................................................................ S-1
(h) Schedule II--Valuation and Qualifying Accounts................................... S-2
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions with the
Company of the executive officers and directors of the Company as of March 31,
1997. Directors will be elected at the Company's annual meeting of stockholders
and serve for one year or until their successors are elected and qualify.
Officers are elected by the Board and their terms of office are at the
discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --- ----------------------------------------------
<S> <C> <C>
Ronald S. Deans................................... 64 Chairman of the Board of Directors, President,
Chief Executive Officer, Chief Financial
Officer and Secretary
Mark G. Deans..................................... 32 Director, Executive Vice President-Sales &
Marketing
R. Scott Deans.................................... 35 Director, Executive Vice President-Operations
Luis Alberto Morato............................... 36 Director
Alan D. Tuck, Jr.................................. 54 Director
Robert S. Parker.................................. 51 Director
</TABLE>
RONALD S. DEANS has served as the Chairman, Chief Executive Officer and
President since he founded the Company in 1973. He has also served as the
Company's Chief Financial Officer and Secretary since
Page 32 of 41 Pages
<PAGE>
September 4, 1996. Mr. Deans has over thirty years experience in the graphics
arts and office products retailing industry. Prior to founding the Company, he
had served as sales manager for Letraset Canada Ltd.
MARK G. DEANS joined the Company in May 1985 working in the marketing
department. Mr. Deans was promoted to Vice President-Marketing in April 1990,
and was promoted to Executive Vice President-Sales & Marketing in September
1995. Mr. Deans has served as a director of the Company since November 1994.
R. SCOTT DEANS joined the Company in February 1985 working in the marketing
and operations departments. Mr. Deans was promoted to Vice President-Operations
in January 1990, and was promoted to Executive Vice President-Operations in
September 1995. Mr. Deans has served as a director of the Company since
September 1995.
LUIS ALBERTO MORATO has been a director of the Company since October 1995.
From March 1993 to the present, Mr. Morato has been an independent civil
engineering consultant. From June 1982 to March 1993, Mr. Morato was a budget
manager with Bytsa Dc C.V., a construction company.
ALAN D. TUCK, JR. served on the board of directors of the Company from
August 1995 until his resignation from the Company's Board in July 1997. Mr.
Tuck has served as President of Greenway Pump Inc., a privately held company
performing research and development of hydraulic pumps, since March 1992. Mr.
Tuck is also an inventor and holder of several U.S. patents. From July 1989 to
March 1992, Mr. Tuck operated Fluid Systems Engineering, a privately held
company performing research and development of hydraulic pumps. Mr. Tuck is a
graduate of the United States Air Force Academy and former U.S. Air Force
Officer and a recipient of a Juris Doctor Degree from the University of
California School of Law in Davis, California.
ROBERT S. PARKER served on the Board of Directors from April 1996 until his
resignation from the Company's Board in August 1997. Mr. Parker has been the
President of Sanford Corporation, a manufacturer of writing instruments and
office supplies, since December 1990. Sanford Corporation is a subsidiary of
Newell Co., a publicly traded company.
FAMILY RELATIONSHIPS
Ronald S. Deans is the father of Mark G. Deans and R. Scott Deans. Ronald S.
Deans serves as the Company's President, Chief Executive Officer, Chief
Financial Officer and Secretary and as Chairman of the Company's Board of
Directors. Mark G. Deans and R. Scott Deans serve as the Company's Executive
Vice President--Sales & Marketing and Executive Vice President--Operations,
respectively. Ronald S. Deans is a director of the Company and serves on the
Company's Audit Committee and the Compensation Committee. Mark G. Deans and R.
Scott Deans are each directors of the Company. Luis Alberto Morato, one of the
Company's directors, is the son-in-law of Fidel Garcia Carrencedo, a former
director of the Company and a current principal shareholder of the Company.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended March 31, 1997, there were two (2) meetings of
the Company's Board of Directors. Each of the incumbent directors attended at
least seventy-five percent (75%) of the meetings of the Board of Directors
during fiscal 1997 except Mr. Morato and Mr. Parker.
The Company has established two standing committees of the Board of
Directors: the Audit Committee and the Compensation Committee.
The Audit Committee was established in April 1991. The Audit Committee's
function is to make recommendations concerning the effectiveness of the
Company's internal auditing methods and procedures, to determine through
discussions with independent auditors whether any limitations or restrictions
have been placed upon them in connection with either the scope of the audit or
its implementation, to
Page 33 of 41 Pages
<PAGE>
review the financial statements and related notes with the auditors to ensure
the statements and notes fully disclose all material facts of the Company, and
to recommend approval or non-approval of such financial statements and related
notes. The Audit Committee met one time during fiscal 1997, and all members of
the Audit Committee attended the meeting.
The Compensation Committee was established in April 1991. The Compensation
Committee's function is to monitor and make recommendations with respect to
compensation of senior officers, as well as the granting of stock options and
stock awards. The Compensation Committee met one time during fiscal 1997 and all
members of the Compensation Committee attended the meeting.
The Company does not have a nomination committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, certain officers and persons
who own more than ten percent (10%) of the Company's outstanding Common Stock
("Reporting Persons") to file with the Securities and Exchange Commission (the
"Commission") initial reports of ownership and reports of changes in ownership
of Common Stock and other equity securities of the Company. Reporting Persons
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) reports.
To the Company's knowledge, based solely on its review of copies of all
Section 16(a) reports furnished to the Company and written representations that
no other reports were required, all Section 16(a) filing requirements applicable
to the Company's directors and officers were complied with.
ITEM 11. EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table shows compensation paid by the Company for services
rendered during its fiscal years ended March 31, 1995, 1996 and 1997 to (a) the
Company's Chief Executive Officer, (b) the four most highly compensated
individuals (other than the Chief Executive Officer) who were serving as
executive officers of the Company at March 31, 1997 and whose total annual
salary and bonus for the fiscal year ended March 31, 1997 exceeded $100,000; and
(c) up to two additional individuals who would have been included under item (b)
above but for the fact that the individual was not serving as an executive
officer of the Company at March 31, 1997 (collectively, the "Named Executive
Officers").
SUMMARY ANNUAL COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES
YEAR ENDED UNDERLYING
NAME AND PRINCIPAL POSITION MARCH 31 SALARY($) BONUS($) OPTIONS(#)
- ----------------------------------------------------------------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Ronald S. Deans ................................................. 1997 $ 275,000 $ 86,379 0
Chairman, President & CEO 1996 234,000 87,629 30,000
1995 181,666 0 0
Mark G. Deans ................................................... 1997 $ 149,903 $ 29,531 0
Director Executive Vice President--Sales & Marketing 1996 111,694 28,184 32,000
1995 79,243 0 30,000
R. Scott Deans .................................................. 1997 $ 149,221 $ 29,531 0
Director Executive Vice President--Operations 1996 111,694 28,184 32,000
1995 79,243 0 30,000
</TABLE>
Page 34 of 41 Pages
<PAGE>
STOCK OPTION GRANTS
The following table sets forth further information regarding grants of
options to purchase Common Stock made by the Company pursuant to the Company's
stock option plans during the fiscal years ended March 31, 1996 and 1997 to each
of the Named Executive Officers.
OPTION GRANTS IN 1996 AND 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE MARKET PRICE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE PER ON DATE OF EXPIRATION ----------------------
NAME GRANTED(#)(1) 1996 AND 1997 SHARE($/SH)(2) GRANT($)(3) DATE 0%($) 5%($)
- ------------------ --------------- --------------- ------------- ------------ ------------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald S. Deans... 30,000(5) 6.0% Cdn $ 2.30 Cdn $ 2.30 August 18, 2000 -- $ 19,063
Mark G. Deans..... 12,000 6.5% Cdn $ 2.00 Cdn $ 2.00 April 25, 2000 -- 6,631
20,000(5) Cdn $ 4.15 Cdn $ 4.15 October 10, 2000 -- 22,931
R. Scott Deans.... 12,000 6.5% Cdn $ 2.00 Cdn $ 2.00 April 25, 2000 -- 6,631
20,000(5) Cdn $ 4.15 Cdn $ 4.15 October 10, 2000 -- 22,931
<CAPTION>
NAME 10%($)
- ------------------ ---------
<S> <C>
Ronald S. Deans... $ 42,125
Mark G. Deans..... 14,652
50,672
R. Scott Deans.... 14,652
50,672
</TABLE>
- ------------------------
(1) The options outstanding as of March 31, 1997 (the "Non-Plan Options") were
not granted pursuant to a written stock option plan. All such options were
fully exercisable immediately upon the grant thereof. The Company adopted a
stock option plan in fiscal 1997 (the "1996 Stock Option Plan"), subject to
shareholder approval. As of March 31, 1997, no options had been granted
under the 1996 Stock Option Plan. At the date of this Report, the Company
had reserved 1,000,000 of Common Stock for issuance upon exercise of
previously granted Non-Plan Options as well as options granted under the
1996 Stock Option Plan.
(2) The exercise price for Non-Plan Options may be paid by delivery of already
owned shares, subject to certain conditions.
(3) With respect to Non-Plan Options, the market value of the Common Stock
underlying such options on the date of grant, as reported in the Toronto
Stock Exchange Trading Summaries.
(4) Potential realizable value is based on the assumption that the fair market
value of the Common Stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the option term.
Disclosure of these assumed rates of appreciation are mandated by the rules
of the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future market price for the Common Stock. The
actual value realized may be greater or less than the potential realizable
value set forth in the table.
(5) Such options were granted during fiscal 1996 subject to approval of the
Company's shareholders which occurred in fiscal 1997.
The following table sets forth certain information as of March 31, 1997
regarding options to purchase Common Stock held as of March 31, 1997 by each of
the Named Executive Officers as well as the exercise of such options during the
fiscal year ended March 31, 1997. In addition, the following table reports the
values for in-the-money options, which values represent the positive spread
between the exercise price of such options and the fair market value of the
Company's Common Stock as of March 31, 1997.
Page 35 of 41 Pages
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FY-END
SHARES VALUE FY-END (#) EXERCISABLE/
ACQUIRED ON REALIZED EXERCISABLE/ UNEXERCISABLE ($)
NAME EXERCISE (#) ($) UNEXERCISABLE (1)
- -------------------------------------------------- ------------- ----------- ------------- -------------------
<S> <C> <C> <C> <C>
Ronald S. Deans................................... -- -- 0/30,000 $ 0/12,408
Mark G. Deans..................................... -- -- 0/20,000 $ 0/8,272
R. Scott Deans.................................... -- -- 0/20,000 $ 0/8,272
</TABLE>
- ------------------------
(1) Calculated on the basis of (a) the closing sales price of the Company's
Common Stock on March 31, 1997, which was $3.50, less the exercise price;
and (b) an exercise price expressed in Canadian dollars and converted into
U.S. dollars assuming an exchange rate on March 31, 1997 of US $0.733 for
Cdn. $1.00, as reported in The Wall Street Journal.
DIRECTOR COMPENSATION
The Company pays each non-employee director a fee of $500 for each meeting
of the Company's Board of Directors attended. Directors are entitled to
reimbursement for reasonable travel and other out-of-pocket expenses incurred in
connection with attendance of meetings of the Company's Board of Directors.
Directors of the Company who are also employees of the Company do not receive
fees for their services as directors.
EMPLOYMENT AGREEMENTS
The Company had no written employment agreements with any of its directors
or officers as of March 31, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, Ronald S. Deans served as a member of the Compensation
Committee. Mr. Deans is the President, Chief Executive Officer, Chief Financial
Officer and Secretary of the Company and Chairman of the Company's Board of
Directors. Mr. Deans is also the father of Mark G. Deans and R. Scott Deans,
Executive Vice President--Sales & Marketing and Executive Vice
President--Operations, respectively, of the Company. None of the other
individuals who served as members of the Compensation Committee during fiscal
1997 has served at any time as an officer or employee of the Company.
Ronald S. Deans is party to certain transactions involving the Company which
are described in "Item 13. Certain Relationships and Related Transactions" of
this Report and are incorporated into this Item 11 by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 8, 1997 with respect to
(i) each shareholder known by the Company to be the beneficial owner of more
than five percent (5%) of the outstanding Common Stock; (ii) each director of
the Company; (iii) each of the Named Executive Officers; and (iv) all current
directors and executive officers as a group. Unless otherwise noted, the Company
believes that the beneficial owners of the Common Stock listed below have sole
investment and voting power with respect to such shares, subject to
Page 36 of 41 Pages
<PAGE>
community property laws where applicable. This table is based upon information
supplied to the Company by directors, officers, and principal shareholders.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS (1) OWNERSHIP(2) OF CLASS(3)
- --------------------------------------------------------------------------- ------------------------ -------------
<S> <C> <C>
Ronald S. Deans (4)........................................................ 757,440 8.0%
Mark G. Deans (5).......................................................... 442,279 4.7%
R. Scott Deans (6)......................................................... 444,518 4.7%
Alan D. Tuck Jr. (7)....................................................... 140,796 1.5%
Robert Parker (8).......................................................... 40,000 *
Luis Alberto Morato........................................................ 20,000 *
All officers and directors
as a group (5 persons) (9)............................................... 1,845,033 19.5%
</TABLE>
- ------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each of the listed beneficial
owners identified is 1555 Odell Road, Blaine, Washington 98231.
(2) Beneficial ownership of the Common Stock is determined in accordance with
the rules and regulation of the Securities and Exchange Commission and
includes shares of Common Stock subject to options, warrants or other rights
which are currently exercisable or exercisable within 60 days of September
8, 1997.
(3) Percentage ownership is based on 9,467,877 shares of Common Stock
outstanding as of September 8, 1997. Each beneficial owner's percentage
ownership is determined by assuming that shares of Common Stock subject to
options, warrants or other rights which are held by such beneficial owner
(but not those held by any other person) and which are exercisable within 60
days of September 8, 1997 have been issued and are outstanding.
(4) Mr. Ronald Deans is Chairman of the Board, President, Chief Executive
Officer, Chief Financial Officer and Secretary of the Company. Includes
43,000 shares in the name of his wife, Ann Deans, and 69,308 shares held by
the Company's 401(k) Plan for which Mr. Deans serves as trustee and
exercises voting control. Also includes 30,000 shares of Common Stock
issuable upon exercise of stock options and 9,756 shares issuable upon
exercise of warrants.
(5) Mr. Mark Deans is the Executive Vice President--Sales & Marketing and a
director of the Company. Includes 20,000 shares of Common Stock issuable
upon exercise of stock options.
(6) Mr. Scott Deans is the Executive Vice President--Operations and a director
of the Company. Includes 20,000 shares of Common Stock issuable upon
exercise of stock options.
(7) Mr. Tuck was a director of the Company as of March 31, 1997. Includes 30,000
shares of Common Stock issuable upon exercise of stock options and 9,756
shares issuable upon exercise of warrants. Mr. Tuck resigned from the
Company's Board of Directors in July 1997.
(8) Mr. Parker was a director of the Company as of March 31, 1997. Mr. Parker
resigned from the Company's Board of Directors in August 1997.
(9) Includes 120,000 shares of Common Stock subject to stock options exercisable
within 60 days of September 8, 1997 and 19,512 shares of Common Stock
subject to warrants exercisable within 60 days of September 8, 1997.
Page 37 of 41 Pages
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In fiscal 1996, Fidel Garcia Carrencedo, a former director of the Company,
and Ronald S. Deans, the Company's President, Chief Executive Officer, Chief
Financial Officer and Secretary and Chairman of the Company's Board of
Directors, made advances to the Company in the amounts of $52,004 and
$1,212,706, respectively. The advances were evidenced by promissory notes
payable on demand and bearing interest at a rate of prime plus 1% per annum.
During fiscal 1997, the note to Mr. Carrancedo was paid in full and payments of
$362,706 were made on the note to Mr. Deans. At March 31, 1997, the outstanding
principal balance of the note to Mr. Deans was $850,000. The note to Mr. Deans
was repaid in full subsequent to the end of fiscal 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. MANAGEMENT CONTRACTS OR COMPENSATORY PLANS OR ARRANGEMENTS
The following is a subset of exhibits described below and contains all
compensatory plans, contracts or arrangements in which any director or executive
officer of the Company is a participant unless the method of allocation of
benefits thereunder is the same for management and non-management participants:
(i) Geographics, Inc. 1996 Stock Option Plan
2. FINANCIAL STATEMENTS
(i) Report of Moss Adams LLP regarding Financial Statements
(ii) Consolidated Balance Sheets as of March 31, 1997 and 1996
(iii) Consolidated Statements of Income for the years ended March 31, 1997,
1996 and 1995
(iv) Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995
(v) Consolidated Statements of Cash Flows for the years ended March 31,
1997, 1996 and 1995
(vi) Notes to Consolidated Financial Statements
3. FINANCIAL STATEMENT SCHEDULES
(i) Report of Moss Adams LLP regarding Schedule II--Valuation of Qualifying
Accounts
(ii) Schedule II--Valuation of Qualifying Accounts
All other schedules have been omitted because the required information is
included in the financial statements or the notes thereto, or is not applicable
or required.
Page 38 of 41 Pages
<PAGE>
4. EXHIBITS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
EXHIBIT NUMBER
(REFERENCED TO
ITEM 601 OF
REGISTRATION S-K) DESCRIPTION OF DOCUMENT
- ----------------- ------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of Geographics, Inc. (1)
3.2 Restated Bylaws of Geographics, Inc. (2)
*10.1 Business Loan Agreement, dated as of February 13, 1996 (the "Loan Agreement"), between
Geographics, Inc. and U.S. Bank of Washington, N.A.
*10.2 Promissory Note, dated February 13, 1996, made by Geographics, Inc. payable to U.S. Bank of
Washington, N.A., pursuant to the Loan Agreement.
*10.3 Loan and Security Agreement, dated as of July 10, 1992, between Geographics, Inc. and U.S. Bank
of Washington, N.A.
*10.4 Master Equipment Lease Agreement, dated as of May 22, 1996 (the "Master Lease"), between
Geographics, Inc. and KeyCorp Leasing Ltd.
*10.5 Subordination Agreement, dated as of May 22, 1996, among U.S. Bank of Washington, N.A., c/o U.S.
Bancorp Mortgage Company and KeyCorp Leasing Ltd.
*10.6 Equipment Schedule No. 4 to the Master Lease, dated as of December 4, 1996, between Geographics,
Inc. and KeyCorp Leasing Ltd.
*10.7 Equipment Schedule No. 4 to the Master Lease, dated as of May 23, 1997, between Geographics,
Inc. and KeyCorp Leasing Ltd.
*10.8 Agreement for Sale of Business, dated November 26, 1996, between Geographics, Inc. and Graham's
Graphics Pty. Ltd.
*10.9 Form of Stock Option Agreement relating to options granted by Geographics, Inc. prior to the
adoption of the Geographics, Inc. 1996 Stock Option Plan.
10.10 Geographics, Inc. 1996 Stock Option Plan (3)
10.11 Form of Stock Option Agreements issued pursuant to the Geographics, Inc. 1996 Stock Option Plan.
(4)
*10.12 Form of Subscription Agreement (the "Subscription Agreement") between Geographics, Inc. and each
of the persons participating in a private placement of units consisting of common stock and
warrants completed in May 1996 (the "Private Placement").
*10.13 Warrant Indenture, dated as of February 4, 1997 (the "Warrant Agreement") between Geographics,
Inc. and Montreal Trust Company of Canada relating to the warrants issued in the Private
Placement.
*10.14 Form of Warrant to Purchase Common Stock issued in the Private Placement pursuant to the Warrant
Agreement.
*10.15 Form of Registration Rights Agreement between Geographics, Inc. and each purchaser of units sold
in the Private Placement.
*11.1 Statement re computation of per share earnings.
*21.1 List of the subsidiaries of Geographics, Inc.
*23.1 Consent of Moss Adams LLP.
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Exhibit is filed herewith.
(1) Incorporated by reference to an identically numbered exhibit to the
Registration Statement on Form 10, as amended, as filed with the Securities
and Exchange Commission on September 12, 1995 (SEC File No. 0-26756).
Page 39 of 41 Pages
<PAGE>
(2) Incorporated by reference to an identically numbered exhibit to the
Registration Statement on Form 10, as amended, filed with the Securities and
Exchange Commission on September 12, 1995 (SEC File No. 0-26756).
(3) Incorporated by reference to Exhibit 4(a) to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
November 26, 1996 (SEC File No. 333-16791).
(4) Incorporated by reference to Exhibit 4(b) to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on
November 26, 1996 (SEC File No. 333-16791).
(b) No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.
Page 40 of 41 Pages
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on this 11th day of
September 1997.
<TABLE>
<S> <C> <C>
GEOGRAPHICS, INC.
By: /s/ RONALD S. DEANS
-----------------------------------------
Ronald S. Deans
CHAIRMAN OF THE BOARD, PRESIDENT,
CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER
AND SECRETARY
</TABLE>
Each person whose individual signature appears below hereby authorizes and
appoints Ronald S. Deans with full power of substitution and full power to act
without the other, as his true and lawful attorney-in-fact and agent to act in
his name, place and stead and to execute in the name and on behalf of such
person, individually and in the capacity of such person stated below, and to
file any and all amendments to this Report together with any exhibits thereto
and any other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ RONALD S. DEANS President, Chief
- ------------------------------ Executive Officer, Chief September 11, 1997
Ronald S. Deans Financial Officer and
Secretary
/s/ MARK G. DEANS Director, Executive Vice
- ------------------------------ President--Sales & September 11, 1997
Mark G. Deans Marketing
/s/ R. SCOTT DEANS
- ------------------------------ Director, Executive Vice September 11, 1997
R. Scott Deans President--Operations
/s/ LOUIS ALBERTO MORATO
- ------------------------------ Director September 11, 1997
Louis Alberto Morato
/s/ DAVID P. MCCLEERY
- ------------------------------ Director September 11, 1997
David P. McCleery
Page 41 of 41 Pages
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Moss Adams LLP regarding Financial Statements..................................................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996................................................... F-3
Consolidated Statements of Income for the years ended March 31, 1997, 1996 and 1995......................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1997, 1996 and 1995............................................................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and 1995..................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
Report of Moss Adams LLP regarding Schedule II--Valuation and Qualifying Accounts........................... S-1
Schedule II--Valuation and Qualifying Accounts.............................................................. S-2
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the accompanying consolidated balance sheets of Geographics,
Inc. as of March 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years ended
March 31, 1997, 1996 and 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above,
present fairly in all material respects, the consolidated financial position of
Geographics, Inc. as of March 31, 1997 and 1996 and the consolidated results of
its operations and its cash flows for each of the years ended March 31, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
15 to the financial statements, the Company has incurred a substantial loss
during the current year and is out of compliance with its borrowing agreements,
which raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As described in note 14 to the consolidated financial statements, the
Company made certain material fourth quarter adjustments that have been
reflected in these consolidated financial statements.
/s/ Moss Adams LLP
Bellingham, Washington
August 26, 1997
F-2
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash............................................................................. $ 408,757 $ 50,028
Accounts receivable
Trade receivables, net of allowance for doubtful accounts, sales returns and
cash discounts of $814,841 in 1997 and $146,926 in 1996...................... 6,654,500 4,974,156
Related party receivables...................................................... -- 899,422
Other receivables.............................................................. 993,243 62,572
Inventory, net of allowance for obsolete inventory of $1,290,000 in 1997 and
$100,000 in 1996............................................................... 9,457,874 9,139,273
Deferred income taxes............................................................ -- 970,000
Prepaid expenses, deposits, and other current assets............................. 893,483 849,081
------------- -------------
Total current assets......................................................... 18,407,857 16,944,532
PROPERTY, PLANT AND EQUIPMENT, NET................................................. 10,832,231 7,286,694
DEFERRED INCOME TAXES.............................................................. -- 192,000
INVESTMENTS IN PARTNERSHIPS........................................................ -- (34,484)
OTHER ASSETS....................................................................... 1,005,613 349,299
------------- -------------
TOTAL ASSETS....................................................................... $ 30,245,701 $ 24,738,041
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts.................................................................. $ 467,445 $ --
Note payable to bank............................................................. 8,649,390 5,322,939
Accounts payable................................................................. 2,421,768 2,634,598
Accrued liabilities.............................................................. 2,145,030 1,033,905
Income tax payable............................................................... -- 145,278
Notes payable to officers and directors.......................................... 850,000 1,264,711
Current portion of long-term debt................................................ 3,472,674 656,398
------------- -------------
Total current liabilities...................................................... 18,006,307 11,057,829
LONG-TERM DEBT..................................................................... 4,322,371 3,690,360
------------- -------------
Total liabilities.............................................................. 22,328,678 14,748,189
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
No par common stock--100,000,000 authorized, 9,467,877 and 8,004,584 issued and
outstanding in 1997 and 1996, respectively..................................... 15,574,018 9,620,068
Foreign currency translation adjustment.......................................... (76,478) --
Retained earnings (accumulated deficit).......................................... (7,580,517) 369,784
------------- -------------
Total stockholders' equity..................................................... 7,917,023 9,989,852
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 30,245,701 $ 24,738,041
------------- -------------
------------- -------------
</TABLE>
See Accompanying Notes to These Financial Statements.
F-3
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
SALES
Wholesale sales................................................... $ 23,840,506 $ 19,758,700 $ 9,129,886
Related party sales............................................... -- 2,854,935 1,056,250
------------- ------------- -------------
Total sales..................................................... 23,840,506 22,613,635 10,186,136
COST OF SALES....................................................... 20,378,594 14,194,505 5,881,649
------------- ------------- -------------
Gross margin...................................................... 3,461,912 8,419,130 4,304,487
SELLING, GENERAL AND ADMINISTRATIVE
Expenses.......................................................... 9,723,210 5,734,901 2,873,476
Amortization of Goodwill............................................ -- 159,768 639,067
------------- ------------- -------------
Income (loss) from operations..................................... (6,261,298) 2,524,461 791,944
------------- ------------- -------------
OTHER INCOME (EXPENSE)
Other income...................................................... 24,907 130,684 15,398
Loss on sales of property and equipment........................... (86,048) (594) (13,468)
Reserve for impairment on EDP installation-in-progress............ (620,759) -- --
Interest expense.................................................. (1,063,075) (787,848) (457,499)
------------- ------------- -------------
Total other income (expense).................................... (1,744,975) (657,758) (455,569)
------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES..................... (8,006,273) 1,866,703 336,375
INCOME TAX PROVISION (BENEFIT)...................................... (55,972) 634,679 (411,367)
------------- ------------- -------------
NET INCOME (LOSS)................................................... $ (7,950,301) $ 1,232,024 $ 747,742
------------- ------------- -------------
------------- ------------- -------------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Primary........................................................... $ (0.85) $ 0.19 $ 0.16
------------- ------------- -------------
------------- ------------- -------------
Assuming full dilution............................................ $ (0.85) $ 0.18 $ 0.14
------------- ------------- -------------
------------- ------------- -------------
SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT
SHARE
Primary........................................................... 9,322,278 6,606,499 4,549,101
------------- ------------- -------------
------------- ------------- -------------
Assuming full dilution............................................ 9,322,278 7,204,220 5,816,260
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK CURRENCY RETAINED
------------------------- TRANSLATION EARNINGS
SHARES AMOUNT ADJUSTMENT (DEFICIT) TOTAL
---------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994................... 4,515,729 $ 3,081,496 $ -- $ (1,609,982) $ 1,471,514
Notes payable and debentures converted to
common stock............................ 334,762 297,042 -- -- 297,042
Common stock issued for cash on exercise
of warrants............................. 325,722 287,043 -- -- 287,043
Net income................................ -- -- -- 747,742 747,742
---------- ------------- ----------- -------------- ------------
BALANCE, March 31, 1995................... 5,176,213 3,665,581 -- (862,240) 2,803,341
Proceeds from issuance of common stock.... 520,000 1,986,100 -- -- 1,986,100
Notes payable, debentures and other
liabilities converted to common stock... 1,540,371 2,169,233 -- -- 2,169,233
Common stock issued for cash on exercise
of stock options and warrants, including
income tax benefit...................... 768,000 1,799,154 -- 1,799,154 1,799,154
Net income................................ -- -- -- 1,232,024 1,232,024
---------- ------------- ----------- -------------- ------------
BALANCE, March 31, 1996................... 8,004,584 9,620,068 -- 369,784 9,989,852
Proceeds from issuance of common stock.... 1,269,293 6,114,062 -- -- 6,114,062
Notes payable, converted to common
stock................................... 30,000 52,005 -- -- 52,005
Common stock issued for acquisition of
subsidiary.............................. 50,000 200,000 -- -- 200,000
Common stock issued for cash on exercise
of stock options and warrants........... 114,000 345,883 -- -- 345,883
Revision of estimate of income tax benefit
from exercise of stock options and
warrants................................ -- (758,000) -- -- (758,000)
Foreign currency translation adjustment... -- -- (76,478) -- (76,478)
Net loss.................................. -- -- -- (7,950,301) (7,950,301)
---------- ------------- ----------- -------------- ------------
BALANCE, March 31, 1997................... 9,467,877 $ 15,574,018 $ (76,478) $ (7,580,517) $ 7,917,023
---------- ------------- ----------- -------------- ------------
---------- ------------- ----------- -------------- ------------
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
GEOGRAPHICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (7,950,301) $ 1,232,024 $ 747,742
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FLOWS FROM OPERATING
ACTIVITIES
Depreciation and amortization 1,372,292 1,124,999 1,295,262
Deferred income taxes 404,000 125,000 (529,000)
Loss on sales of property and equipment 86,048 594 13,468
Reserve for impairment on EDP installation-in-progress 620,759 -- --
CHANGES IN NONCASH OPERATING ASSETS AND LIABILITIES
Trade receivables (1,500,098) (2,561,832) (1,471,823)
Related party receivables 899,422 (560,447) (338,975)
Other receivables (930,671) (3,357) (19,504)
Inventory (121,153) (6,238,118) (1,059,674)
Prepaid expenses, deposits and other current assets (44,402) (517,278) (210,110)
Accounts payable (212,830) 1,315,997 1,074,647
Accrued liabilities 920,286 814,756 (48,828)
Income tax payable (145,278) 336,645 167,633
------------ ----------- -----------
Net cash flows from operating activities (6,601,926) (4,931,017) (379,162)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in bank overdrafts 467,445 -- --
Net borrowings on note payable to bank 3,326,451 3,139,463 990,427
Proceeds from long-term debt borrowings 2,333,526 1,003,029 765,125
Repayment of long-term debt (875,134) (467,986) (232,685)
Proceeds from notes payable to officers and directors -- 2,452,573 22,746
Repayments of notes payable to officers and directors (362,706) (398,629) (134,888)
Proceeds from issuance of common stock 6,459,945 2,827,254 287,043
Foreign currency translation (76,478) -- --
------------ ----------- -----------
Net cash flows from financing activities 11,273,049 8,555,704 1,697,768
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of plant and equipment (4,159,500) (3,296,165) (1,463,768)
Proceeds from sales of equipment 50,887 16,741 30,000
Net advances from (repayments to) partnerships (34,484) (56,786) 250,422
Increase in other assets (169,297) (253,797) (119,912)
------------ ----------- -----------
Net cash flows from investing activities (4,312,394) (3,590,007) (1,303,258)
------------ ----------- -----------
NET CHANGE IN CASH 358,729 34,680 15,348
CASH, beginning of year 50,028 15,348 --
------------ ----------- -----------
CASH, end of year $ 408,757 $ 50,028 $ 15,348
------------ ----------- -----------
------------ ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES
Financing obtained in acquisition of equipment $ 1,989,895 $ 1,110,242 $ 346,644
------------ ----------- -----------
------------ ----------- -----------
Issuance of common stock on conversion of notes payable, debentures
and other liabilities $ 52,005 $ 2,169,233 $ 297,042
------------ ----------- -----------
------------ ----------- -----------
Issuance of common stock for acquisition of subsidiary $ 200,000 $ -- $ --
------------ ----------- -----------
------------ ----------- -----------
Income tax benefit (expense) related to exercise of stock options
and warrants $ (758,000) $ 958,000 $ --
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
See Accompanying Notes to These Consolidated Financial Statements
F-6
<PAGE>
NOTE 1--DESCRIPTION OF OPERATIONS
Geographics, Inc. (the "Company") is a Wyoming corporation with its offices
and main manufacturing facilities located in Blaine, Washington. The Company
also has warehouse/distribution facilities near London, England, and Brisbane,
Australia and a warehouse/distribution facility in Bellingham, Washington. The
Company is a manufacturer of designer stationeries, value-added papers,
lettering, signage and graphic art products.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation--The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
Geographics (Europe) Limited, Geographics Pty. Limited and Geographics Marketing
Canada Inc. Significant intercompany transactions have been eliminated in
consolidation. On July 1, 1996, a merger between the Company and Grahams
Graphics Pty. Ltd., an Australian distributor, was completed. In connection with
this transaction, the Company issued 50,000 shares of common stock, valued at
approximately $200,000 (approximate market value), assumed liabilities of
approximately $150,000 and paid cash of $40,000. This merger was accounted for
as a purchase, with no goodwill recognized on the transaction.
(b) Cash and Equivalents--For purposes of the statement of cash flows, cash
and equivalents include cash on deposit with banks and other highly liquid
investments with original maturities of ninety days or less.
(c) Accounts Receivable--The Company typically offers credit terms to its
customers, which generally require payment within sixty days. Management
considers all accounts receivable in excess of the allowance for doubtful
accounts to be fully collectible. Accounts receivable are not collateralized.
(d) Inventory--Inventory is valued at the lower of cost on a first-in,
first-out (FIFO) basis or market.
(e) Property, Plant and Equipment--Property, plant and equipment is stated
at historical cost. Depreciation is provided based on useful lives of three to
forty years, using primarily the straight-line method. Betterments, renewals and
repairs that extend the life of assets are capitalized. Repairs and maintenance
items are expensed when incurred. Depreciation expense was $1,280,801, $894,570
and $622,737 during the years ended March 31, 1997, 1996 and 1995, respectively.
(f) Goodwill--Goodwill, representing the excess of purchase price and
related costs over the value assigned to the net tangible assets of businesses
acquired, was amortized on a straight-line basis over a period of two years.
Goodwill was fully amortized at March 31, 1997.
(g) Federal Income Taxes--The Company accounts for income taxes using the
liability method. Under this method, deferred tax assets and liabilities
represent the estimated tax effects of future deductible or taxable amounts
attributed to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. This method also allows
recognition of income tax benefits for loss carryforwards, credit carryforwards
and certain temporary differences for which tax benefits have not previously
been recorded. The tax benefits recognized as assets must be reduced by a
valuation allowance where it is more likely than not the benefits may not be
realized.
(h) Foreign Currency Translation--The financial statements of the Company's
non-U.S. subsidiaries whose "functional" currencies are other than U.S. dollars
are translated at current rates of exchange. Income and expense items are
translated at the average exchange rate for the year. The resulting translation
adjustments are recorded directly into a separate component of stockholders'
equity, if significant. Certain other translation adjustments and transaction
gains and losses are reported in net income in the period they are realized.
(i) Investment in Partnership--International Geographics of Ontario, a
general partnership owned 70% by the Company, (the "Partnership") was dissolved
during 1996 and terminated operations during
F-7
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997. The Company accounted for its 70 percent interest in the partnership using
the equity method. The effect of consolidating the accounts of the Partnership
would be immaterial to these consolidated financial statements. Advances between
the Company and the Partnership for working capital purposes are accounted for
as changes to investments in Partnership. The Partnership distributed the
Company's products in Canada prior to its dissolution.
(j) Earnings per Common and Common Equivalent Shares--Primary earnings per
common share equals net income (loss) divided by the weighted average number of
common shares outstanding, after giving effect to dilutive stock options and
warrants. Fully diluted earnings per common share equals net income (loss) plus
after-tax interest incurred on convertible debentures divided by the weighted
average number of common shares outstanding after giving effect to dilutive
stock options, warrants and shares assumed to be issued on conversion of the
convertible debentures. There were no convertible debentures outstanding during
the year ended March 31, 1997. Fully diluted earnings per common share includes
$44,712 and $66,792 in after-tax interest on convertible debentures during the
years ended March 31, 1996 and 1995, respectively. Shares deemed outstanding for
stock options, warrants or convertible debentures are disregarded when such
terms are considered anti-dilutive or have the effect of reducing reported
losses per share.
(k) Use of Estimates--The preparation of consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The following significant estimates are included in the financial
statements.
DEPRECIATION--Depreciation represents an expense allocation matching asset
costs to revenue earned over the estimated lives of assets owned by the Company.
Periodically, the Company re-evaluates the lives and methods of depreciation
applied to its property and equipment and considers such things as general
condition and utility, technological status and economic viability. Such
evaluations may result in the Company's revision and adjustment of asset
carrying values in relatively short-term time periods.
INCOME TAX--The Company operates in a number of taxing jurisdictions and
endeavors to comply with all tax laws as applicable, consistent with minimizing
taxes paid by the Company where possible. To comply with these laws the Company
must allocate and prorate certain items of revenue and expense in addition to
establishing appropriate transfer pricing policies. These allocations and
policies are subject to scrutiny and audit which may result in the Company's
need to adjust its tax accruals and provisions as a result of its interactions
with taxing authorities.
SALES RETURNS AND ALLOWANCE--The Company currently estimates an allowance
for sales returns as a percentage of sales, based on historical information.
Changes in market conditions and demand for the Company's products could result
in customers returning products in an amount greater than that currently allowed
for. Depending upon the volume of sales returns, such amounts could impact
future gross margins.
INVENTORY--Gross margins on inventory sales have experienced a sharp decline
over prior years and previously reported interim periods, and certain product
lines have become slow moving and may be subject to eventual obsolescence. The
Company has recorded an estimate of the ultimate realizability of inventory in
anticipation of these factors. In addition, the Company has further developed a
program to provide substantial dealer incentives on purchases of the slow moving
product lines, and anticipates improving margins resulting from future sales
price increases and lower manufacturing costs. It is also reasonably possible,
however, that the program for sales of slow moving items will not be wholly
successful
F-8
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and anticipated changes in gross margins from lower production costs and
increased sales prices will not materialize, and, accordingly, losses could be
experienced in future periods.
PROPERTY, PLANT AND EQUIPMENT--It is the Company's policy to record
property, plant and equipment and other long-lived assets at historical cost and
depreciate these assets over their expected useful life. The Company has
sustained significant losses as shown in the accompanying consolidated financial
statements and described in Note 15, and may be unable to continue as a going
concern. It is reasonably possible that the Company's estimate that it will
recover the carrying amount of long-lived assets from future operations will
change in the near term.
(l) Advertising Costs--Advertising costs are charged to expense in the
period in which they occur except for direct response advertising which is
capitalized and amortized over its expected period of future benefits. Direct
response advertising consists primarily of advertisements placed with industry
related catalogs and are amortized over the period following the mailing date at
a rate approximating the rate and timing of customer response. Advertising costs
of $58,275 were capitalized during 1997, of which $40,950, remains unamortized
and is included as other assets at March 31, 1997. No advertising costs were
capitalized at March 31, 1996.
The Company also participates with its customers in cooperative advertising
and other promotional programs, in which the Company reimburses the customers
for a portion of their advertising costs. Advertising expense amounted to
$1,924,442, $867,198 and $271,160 in 1997, 1996 and 1995, respectively.
(m) Fair Value of Financial Instruments--Statement of Financial Accounting
Standard ("SFAS") No. 107, DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of the fair value of financial instruments, both assets and
liabilities, recognized and not recognized, in the consolidated balance sheet of
the Company for which it is practicable to estimate fair value. The estimated
fair values of financial instruments which are presented herein have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of amounts the Company
could realize in a current market exchange.
The following methods and assumptions were used to estimate fair value:
CASH, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES--The carrying
amounts of cash, receivables, accounts payable and accrued liabilities
approximate fair value due to their short-term nature.
NOTES PAYABLE AND LONG-TERM DEBT--Discounted cash flows using current
interest rates for financial instruments with similar characteristics and
maturity were used to determine the fair value of notes payable and long-term
debt.
There were no significant differences as of March 31, 1997 and 1996 in the
carrying value and fair value of financial instruments.
(n) New Accounting Standards--In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, EARNINGS PER SHARE. The new standard replaces primary and fully diluted
earnings per share with basic and diluted earnings per share. SFAS No. 128 is
required to be adopted by the Company in the year ending March 31, 1998. The
Company is studying the new accounting standard to determine its impact, and
plans to adopt SFAS 128 in the year ending March 31, 1998.
In June 1997, the FASB issued SFAS No. 130, COMPREHENSIVE INCOME and SFAS
No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 130 establishes standards for reporting
F-9
<PAGE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and display of comprehensive income and its components. SFAS No. 131 establishes
standards for reporting about operating segments, products and services,
geographic areas, and major customers. The standards become effective for fiscal
years beginning after December 15, 1997. Management plans to adopt these
standards in the year ending March 31, 1999. Management has not determined the
effect that adoption of these standards will have on its financial condition or
reported results of operation.
(o) Reclassifications--Certain prior year amounts have been reclassified to
conform to current year presentation. Such reclassifications had no effect on
previously reported earnings or financial position.
NOTE 3--INVENTORY
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 672,635 $ 1,325,837
Work in progress.................................................. 3,396,754 3,304,407
Finished goods.................................................... 6,678,485 4,609,029
------------ ------------
10,747,874 9,239,273
Less allowance for obsolete inventory............................. 1,290,000 100,000
$ 9,457,874 $ 9,139,273
------------ ------------
------------ ------------
</TABLE>
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION NET BOOK VALUE
AND ---------------------------
COST AMORTIZATION 1997 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Land................................................... $ 114,563 $ -- $ 114,563.00 $ 114,563
Buildings.............................................. 3,833,291 763,057 3,070,234 2,770,491
Machinery and equipment................................ 3,024,039 1,389,021 1,635,018 1,181,242
Machinery and equipment under capital lease............ 4,948,977 667,822 4,281,155 1,641,477
Display racks.......................................... 2,356,205 1,200,381 1,155,824 1,066,350
Computers and software................................. 456,463 232,234 224,229 194,407
Automobiles............................................ 460,447 202,107 258,340 214,231
Leasehold improvements................................. 34,757 7,967 26,790 27,792
EDP installation-in-progress, net of allowance of
$620,759 in 1997..................................... 66,078 -- 66,078 76,141
------------- ------------ ------------- ------------
$ 15,294,820 $4,462,589 $ 10,832,231 $ 7,288,690
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
</TABLE>
During the last quarter of 1997, the Company recorded reserves of $620,759
for hardware, software and implementation costs classified as EDP
installation-in-progress, relating to the implementation of a new management
information system. The Company recorded the reserves in response to an
evaluation of the functionality of the new management information system,
implementation difficulties and the possible need for additional expenditures to
obtain desired operating efficiencies and requirements.
F-10
<PAGE>
NOTE 5--OTHER ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
Equipment deposits.................................................. $ 556,390 $ --
Other............................................................... 236,168 78,749
Trademarks.......................................................... 109,480 80,262
Setup costs......................................................... 103,575 190,288
$ 1,005,613 $ 349,299
------------ ----------
------------ ----------
</TABLE>
NOTE 6--FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Installment notes payable to a bank, fixed interest rates ranging from 8.825% to 10%,
payable in monthly installments through November 2010, collateralized by real
estate.............................................................................. $ 2,408,948 $ 2,341,057
Capital lease obligations collateralized by certain equipment and fixtures............ 5,133,327 1,609,424
Installment notes payable to banks, interest rates ranging from fixed and 9.75% to
variable rates from prime plus and 1% to prime plus 1.5%, payable in monthly
installments through October 2000, collateralized by certain equipment.............. 252,770 396,277
------------ ------------
7,795,045 4,346,758
Less current portion.................................................................. 3,472,674 656,398
------------ ------------
$ 4,322,371 $ 3,690,360
------------ ------------
------------ ------------
</TABLE>
The prime rate was 8.50% and 8.25% at March 31, 1997 and 1996, respectively.
The Company has a revolving credit agreement with a bank for up to
$12,000,000, subject to borrowing base limitations of 80% of eligible accounts
receivable and 55% of inventories, net of reserves. Interest on outstanding
advances is payable monthly at the bank's prime rate, with a stated due date of
June 30, 1997. Subsequent to year end the Company received extensions of the due
date to October 31, 1997. Total outstanding advances under revolving credit
agreements were $8,649,390 and $5,322,939 at March 31, 1997 and 1996,
respectively. Subsequent to year end, the Company utilized the remaining balance
of this revolving credit facility.
The Company also has installment notes with the same bank. The revolving
credit agreement and installment notes are collateralized by substantially all
of the assets of the Company. As a result of the Company's non-compliance with
covenants under the revolving credit agreement, as discussed in Note 15, the
Company is also out of compliance with debt covenants on installment notes
payable to the same lender at March 31, 1997, and accordingly, all outstanding
balances on these related financing arrangements have been classified as current
liabilities.
At March 31, 1997, the terms of the agreements provide principal payments on
long-term debt and capital lease obligations as follows:
<TABLE>
<S> <C>
1998.............................................. $3,472,674
1999.............................................. 901,459
2000.............................................. 975,906
2001.............................................. 991,902
2002.............................................. 696,694
Thereafter........................................ 756,410
----------
$7,795,045
----------
----------
</TABLE>
F-11
<PAGE>
NOTE 6--FINANCING ARRANGEMENTS (CONTINUED)
Future minimum lease payments under capital leases together with the present
value of minimum lease payments as of March 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................ $1,249,811
1999............................................................ 1,240,078
2000............................................................ 1,228,210
2001............................................................ 1,165,112
2002............................................................ 794,023
Thereafter...................................................... 815,225
----------
Total minimum lease payments.................................... 6,492,459
Less amount representing imputed interest....................... (1,359,132)
----------
Present value of minimum lease payments......................... $5,133,327
----------
----------
</TABLE>
In prior years, the Company had convertible subordinated debentures
("debentures") outstanding. The debentures were convertible at the holder's
option into common shares of the Company at a conversion rate of 904 common
shares per $1,000 principal amount of debenture. At March 31, 1996, all
debentures have been converted.
NOTE 7--FEDERAL INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Current provision (benefit)................................................ $ (459,972) $ 509,679 $ 117,633
Deferred provision (benefit)............................................... 404,000 125,000 (529,000)
----------- ---------- -----------
Total income tax provision (benefit)............................... $ (55,972) $ 634,679 $ (411,367)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The total tax provision differs from the amount computed using the statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Tax expense (benefit) at statutory rate.............................. $ (2,721,000) $ 635,000 $ 114,000
Exercise of stock options and warrants............................... (758,000) -- --
Other differences, net............................................... (350,972) (321) (64,367)
Change in valuation allowance for deferred tax assets................ 3,774,000 -- (461,000)
------------- ------------- -------------
Total income tax provision (benefit)......................... $ (55,972) $ 634,679 $ (411,367)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-12
<PAGE>
NOTE 7--FEDERAL INCOME TAXES (CONTINUED)
The significant components of deferred income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- -----------
<S> <C> <C> <C>
Change in valuation allowance for deferred tax assets..................... $ 3,774,000 $ -- $ (461,000)
Depreciation of plant and equipment....................................... 244,000 88,000 43,000
Change in tax credit carryforward......................................... 34,000 105,000 (137,000)
Amortization of goodwill and intangibles.................................. 31,000 (31,000) (175,000)
Change in charitable contributions carryforward........................... (4,000) 31,000 2,000
Other differences, net.................................................... (4,000) (20,000) 13,000
Change in allowance for doubtful accounts................................. (8,000) (38,000) 4,000
Increase in cash surrender value of life insurance........................ (35,000) -- --
Increase in accounts for financial reporting purposes..................... (50,000) -- --
Inventory differences..................................................... (416,000) (10,000) 43,000
Effect of net operating loss carryforwards................................ (3,162,000) -- 139,000
------------- ---------- -----------
Total deferred income tax expense (benefit)....................... $ 404,000 $ 125,000 $ (529,000)
------------- ---------- -----------
------------- ---------- -----------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
DEFERRED TAX ASSETS
Net operating losses, before carryback............................................... $ 3,162,000 $ --
Inventory, principally due to additional cost inventoried for tax purposes and
financial statement allowances..................................................... 475,000 59,000
Goodwill and intangible assets, principally due to amortization differences.......... 349,000 380,000
Accruals for financial reporting purposes............................................ 71,000 21,000
Alternative minimum tax credit carryforwards......................................... 70,000 104,000
Accounts receivable, due to allowance for doubtful accounts.......................... 58,000 50,000
Cash surrender value of life insurance............................................... 35,000 --
Other differences, net............................................................... 12,000 4,000
Income tax benefit related to exercise of stock options and warrants................. -- 758,000
------------- ------------
Net deferred tax assets............................................................ 4,232,000 1,376,000
DEFERRED TAX LIABILITIES
Plant and equipment, principally due to depreciation differences..................... 458,000 214,000
------------- ------------
Net deferred tax assets before valuation allowance........................... 3,774,000 1,162,000
Valuation allowance.................................................................. (3,774,000) --
Net deferred tax assets...................................................... $ -- $ 1,162,000
At March 31, 1997 and 1996, the Company's net deferred tax assets are presented as
follows:
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Current deferred tax assets.......................................................... $ -- $ 970,000
Long-term deferred tax assets........................................................ -- 192,000
$ -- $ 1,162,000
------------- ------------
------------- ------------
</TABLE>
Based on the Company's current operating income and expectations for the
future, management determined that future operating and taxable income may not
be sufficient to fully recognize all deferred tax assets existing at March 31,
1997. As a result, the carrying value of the net deferred tax asset was
F-13
<PAGE>
NOTE 7--FEDERAL INCOME TAXES (CONTINUED)
decreased by $3,774,000 at March 31, 1997. This decrease was recognized as an
income tax provision during the year ended March 31, 1997.
At March 31, 1997, the Company has alternative minimum tax credit
carryforwards of approximately $70,000 which are available to reduce future
regular federal income taxes over an indefinite period. Net operating loss
carryforwards approximating $6,800,000 are available to offset future taxable
income through 2012. In addition, net operating losses on foreign operations of
approximately $1,000,000 are available to the Company subject to foreign tax
rules.
NOTE 8--STOCKHOLDERS' EQUITY
STOCK OPTION AND INCENTIVE PLANS-- As of March 31, 1997, the Company had
reserved 1,000,000 shares of common stock for issuance to key employees,
officers and directors pursuant to the 1996 Stock Option Plan. Options granted
under the Plan qualify as incentive stock options and will generally not be
taxable to the holder until the share subject to the option is ultimately sold
by the holder of the option. There were no shares granted pursuant to this plan
as of March 31, 1997. Options to purchase the Company's common stock are granted
at a price equal to or greater than the market price of the stock at the date of
grant, and are exercisable upon issuance and regulatory approval. All options
expire no more than ten years after the date of grant. Prior to the formation of
the 1996 Stock Option Plan, the Company granted nonqualified stock options on a
case by case basis as deemed appropriate by the Board of Directors.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION. The pro forma information recognizes, as compensation,
the value of stock options granted using an option valuation model. Pro forma
earnings per share amounts also reflect an adjustment for an assumed purchase of
stock from proceeds deemed obtained from the issuance of stock options. The fair
value for options issued in 1996 is estimated at $181,000, net of tax. There
were no options granted in 1997 and therefore no presentation is required for
1997.
The following assumptions were used to estimate the fair value of the
options:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Risk-free interest rate............................................................. 6.26 %
Dividend yield rate................................................................. -- %
Price volatility.................................................................... .6787
Weighted average expected life of options........................................... 1.60 yr.
</TABLE>
Management believes that the assumptions used in the option pricing model
are highly subjective and represent only one estimate of possible value, as
there is no active market for the options granted. The fair value of the options
granted in 1996 are recognized in the period issued because they are immediately
exercisable.
F-14
<PAGE>
NOTE 8--STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma disclosures:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Net income as reported.......................................................... $ 1,232,024
Additional compensation for fair value of stock options......................... $ 181,000
Pro forma net income............................................................ $ 1,051,024
Pro forma earnings per share
Primary..................................................................... $ .15
Assuming full dilution...................................................... $ .15
</TABLE>
<TABLE>
<CAPTION>
NONQUALIFIED
COMMON STOCK OPTION PRICE
OPTIONS PER SHARE ($)
-------------- -------------
<S> <C> <C>
BALANCE, March 31, 1994........................................ 451,000
Granted............................................. 129,000 .84 to 1.03
Exercised........................................... (128,000) .92 to 1.03
--------------
BALANCE, March 31, 1995........................................ 452,000
Granted............................................. 496,000 1.47 to 3.57
Exercised........................................... (628,000) .73 to 2.56
--------------
BALANCE, March 31, 1996........................................ 320,000
Granted............................................. --
Exercised........................................... (144,000) .73 to 2.56
Expired............................................. (2,500) 3.04
--------------
BALANCE, March 31, 1997........................................ 173,500
--------------
--------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------------------------- ----------- ------------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$ Up to 2.......................... 86,000 3.07 years $ 1.51 86,000 $ 1.51
2 to 4........................... 87,500 3.54 years 3.04 87,500 3.04
</TABLE>
In addition, warrants to purchase 1,342,293 and 24,000 shares of common
stock at prices ranging from $.77 to $6.50, and $.75 to $4.77, were outstanding
as of March 31, 1997 and 1996, respectively. These warrants are exercisable upon
issuance and expire from April 15, 1998 to December 1, 2001. The exercise price
of the warrants was equal to the market price of the stock at the date the
warrants were issued.
During the current year the Company's shareholders and its Board of
Directors approved a resolution to increase the Company's authorized shares from
ten million to one hundred million. Subsequent to year end, the Company
commenced preparation of Articles of Amendment amending the Articles of
Incorporation in accordance with this resolution. The Company anticipates filing
the Articles of Amendment during fiscal year ended 1998.
NOTE 9--RELATED PARTY TRANSACTIONS
On September 15, 1995, officers and directors converted debentures in an
aggregate face amount of $200,000 into 219,178 common shares. The debentures
were convertible at the holder's option into
F-15
<PAGE>
NOTE 9--RELATED PARTY TRANSACTIONS (CONTINUED)
common shares of the Company at Cdn. $1.25 per share, to a maximum of 219,178
common shares. There is no remaining balance of debentures outstanding at March
31, 1997.
The Company issued $996,000 of convertible debentures payable to certain
officers and directors of the Company on September 26, 1995. The debentures were
convertible at the holder's option into common shares of the Company at Cdn.
$4.45 per share, to a maximum 274,233 common shares. On December 22, 1995, these
debentures were converted into 274,233 common shares, and are no longer
outstanding.
At March 31, 1996, certain officers and directors had advanced the Company
$1,264,711 in the form of uncollateralized notes payable. The notes are payable
on demand and are classified as current liabilities. Interest on these notes are
payable monthly at the rate of prime plus 1%. As of March 31, 1997, the balance
remaining on these notes payable to a certain officer totaled $850,000. The
outstanding balance at March 31, 1997 was paid in full subsequent to year end.
Total interest costs associated with these notes and debentures was
approximately $92,000 for the year ended March 31, 1997 and $60,000 during each
of the years ended March 31, 1996 and 1995.
On January 23, 1996, the Company completed a private placement of 500,000
common shares to officers and directors of the Company at a price of Cdn. $5.75.
Total cash received, net of issuance costs, totaled $1,906,100.
Effective April 1, 1996, the Company transferred to Geographics Marketing
Canada, Inc., a wholly-owned subsidiary, the exclusive rights to market and
distribute the Company's products in Canada. These marketing and distribution
rights were previously maintained by Martin Distribution, Inc. ("Martin"), a
company related through common directorship. As such, the financial results of
Geographics Marketing Canada, Inc. have been included in the consolidated
results of Geographics, Inc. for fiscal year ended March 31, 1997, with all
material intercompany transactions eliminated.
Sales to Martin amounted to $2,854,935 and $1,056,250 during the years ended
March 31, 1996 and 1995, respectively. Trade receivables due from Martin
amounted to $899,422 at March 31, 1996. No sales to Martin were made during the
year ended March 31, 1997, and no amounts were due from Martin as of that date.
International Geographics of Ontario recorded purchases from Martin in the
aggregate amount of $118,659 and $261,765 during the years ended March 31, 1996
and 1995, respectively. No purchases were made from Martin during the year ended
March 31, 1997.
The Company has approximately $210,000 due to Guildmark, Inc., a company
related through common ownership, included in accounts payable at March 31,
1997.
NOTE 10--EMPLOYEE BENEFIT PLANS
On April 1, 1995, the Board of Directors approved a retirement savings plan,
which permits eligible employees to make contributions to the plan on a pretax
salary reduction basis in accordance with the provisions of Section 401(k) of
the Internal Revenue Code. The Company makes a matching stock contribution of
10% of the employee's pretax contribution. Eligible employees may contribute up
to 18% of their pretax compensation. Total expense related to this plan was
$36,296 and $20,619 during the year ended March 31, 1997 and 1996, respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
LEASES--The Company conducts certain operations in leased facilities, under
leases that are classified as operating leases for financial statement purposes.
The leases provide for the Company to pay real estate
F-16
<PAGE>
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
taxes, common area maintenance, and certain other expenses. Lease terms,
excluding renewal option periods exercisable by the Company at escalated rents,
expire between August 1996 and February 2006. In addition to the base lease
term, the Company has various renewal option periods. In addition, certain
equipment used in the Company's operations is also leased under operating
leases. A schedule of noncancelable operating lease commitments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.......................................................... $ 365,103
1999.......................................................... 152,253
2000.......................................................... 67,403
2001.......................................................... 46,164
----------
$ 630,923
----------
----------
</TABLE>
EQUIPMENT DEPOSITS--On January 17, 1997, the Company placed an order for a
printing press and has a deposit of $219,000 which is included in other assets
at March 31, 1997. The cost of the press is approximately $2,190,000. Upon
taking delivery of the press during the first quarter of fiscal year 1998, the
Company obtained capital lease financing for this equipment.
LITIGATION--In July 1997, three related class action suits were filed in the
United States District Court for the Western District of Washington against the
Company, its President, Chief Executive Officer and Chairman of its Board of
Directors, and the Company's former Vice President of Finance and Chief
Financial Officer (the "Defendants"). The suits allege that the Defendants
inflated the price of the Company's stock by intentionally or recklessly making
misrepresentations or omissions which deceived the public about the Company's
financial condition and prospects, thus misleading shareholders who purchased
shares between August 6, 1996 and June 12, 1997. The complaints seek damages in
unstated amounts.
Management intends to vigorously defend these complaints, however the
ultimate outcome of these actions cannot be predicted with certainty. The
Company owns insurance policies with aggregate limits of $5 million, applicable
to certain losses including costs of defense. These insurance policies have an
aggregate self-insurance retention of $150,000. If the Company is determined to
be liable for, or otherwise agrees to settle or compromise, any claim, there is
no assurance that any or all of such liability, compromise or settlement would
be covered by the Company's insurance. If the amount of insurance is
insufficient, or if the policies are determined to be inapplicable, the Company
could be required to make a payment in the form of cash, indebtedness or equity
securities. A payment of this nature could have a negative material impact on
the Company's capital resources and issuance of additional equity securities
could have a negative material impact on the Company's existing shareholders.
The defense of this or any pending or future litigation, investigations or
disputes could result in substantial legal and professional costs to the
Company.
There are various additional claims, lawsuits, and pending actions against
the Company incident to the operations of its business. It is the opinion of
management that the ultimate resolution of these matters and any future
unidentified claims will not have a material effect on the Company's financial
position, results of operations or liquidity.
CONTINGENCY FOR YEAR 2000 ISSUES--The Company has not yet made an assessment
of the impact of the year 2000 on their computer software, hardware and other
systems, including those of vendors, customers and other third parties. The
potential expense to ensure that all of the computer and other systems are year
2000 compliant cannot be determined until such an assessment is made.
F-17
<PAGE>
NOTE 11--COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT CONTRACTS--Subsequent to year end, the Company entered into
employment contracts with certain employees for a period of up to three years.
The contracts provide for severance payments in the event these employees
terminate employment for certain specified reasons during the contract period.
NOTE 12--INFORMATION ABOUT CREDIT RISK AND BUSINESS CONCENTRATIONS
Assets for which the Company has credit risk include trade accounts
receivable, which amounted to $6,654,500 and $5,873,578 at March 31, 1997 and
1996, respectively. The Company's trade customers are concentrated in the retail
office products industry and mass market retail stores. Sales to four major
customers approximated 74%, 80% and 65% of total sales for the years ended March
31, 1997, 1996 and 1995, respectively. Amounts due from three customers
approximated 89% and 75% of the total accounts receivable at March 31, 1997 and
1996, respectively.
The Company expects that sales to relatively few customers will continue to
account for a high percentage of its net sales in the foreseeable future and
believes that its financial results depend in significant part upon the success
of these few customers. Although the composition of the group comprising the
Company's largest customers may vary from period to period, the loss of a
significant customer or any reduction in orders by any significant customers,
including reductions due to market, economic or competitive conditions in the
designer stationary or specialty papers industry, may have a material adverse
effect on the Company's business, financial condition and results of operations.
The following table represents approximate sales and trade accounts
receivable related to the geographic regions in which the Company operates.
<TABLE>
<CAPTION>
1997
TOTAL UNITED STATES CANADA OTHER
----- ------------- ------ -----
<S> <C> <C> <C> <C>
Sales............................................. 100% 78% 16% 6%
----- --- ------ -----
----- --- ------ -----
Accounts receivable............................... 100% 86% 9% 5%
----- --- ------ -----
----- --- ------ -----
<CAPTION>
1996
TOTAL UNITED STATES CANADA OTHER
----- ------------- ------ -----
<S> <C> <C> <C> <C>
Sales............................................. 100% 86% 13% 1%
----- --- ------ -----
Accounts receivable............................... 100% 83% 15% 2%
----- --- ------ -----
----- --- ------ -----
<CAPTION>
1995
TOTAL UNITED STATES CANADA OTHER
----- ------------- ------ -----
<S> <C> <C> <C> <C>
Sales............................................. 100% 89% 10% 1%
----- --- ------ -----
----- --- ------ -----
Accounts receivable............................... 100% 85% 12% 3%
----- --- ------ -----
----- --- ------ -----
</TABLE>
The Company purchases goods from approximately 700 vendors. One vendor
accounted for a significant portion of the Company's total merchandise purchases
during the years ended March 31, 1997, 1996 and 1995. The Company purchases
commodity paper and other related products from this broker/ vendor that could
be supplied by other sources. There can be no assurances that the relationship
between the Company and this vendor will continue and the loss of the purchasing
power the Company has established with this company would likely have a material
adverse effect on the Company. The Company does not consider itself dependent on
any single source for materials to manufacture its products.
F-18
<PAGE>
NOTE 13--SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for interest................... $ 995,691 $ 812,416 $ 465,377
---------- ---------- ----------
---------- ---------- ----------
Net cash paid (received) during the year for income
taxes.................................................. $ 304,303 $ 173,034 $ (50,000)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 14--QUARTERLY INFORMATION
During the fourth quarter, the Company determined that inventories were
overstated by approximately $5.6 million and that a material adjustment was
therefore required. Approximately $4.6 million of the adjustment was required to
reflect the results of the year end physical counts of inventories on hand. The
remaining $1 million was recorded to reflect the Company's estimate of reserves
required for obsolete and slow-moving items. Although the Company believes that
the overstatements occurred over the course of fiscal 1997, it has determined
that, given the complexity of the issues involved, it is not possible to
allocate accurately the adjustment to any interim periods. Accordingly, the
quarterly information for fiscal 1997 has not been restated to reflect an
allocation of the adjustment.
In light of the losses incurred during fiscal 1997, the Company decided to
provide a valuation allowance on all of its deferred tax assets. This valuation
allowance was recorded in the fourth quarter and increased the net loss by
approximately $3,774,000.
NOTE 15--LIQUIDITY AND OPERATIONS
As shown in the accompanying financial statements, the Company incurred a
net loss of $7,950,301 for the year ended March 31, 1997. As a result of this
loss, a decline in gross profit margins, the Company's failure to comply with
certain covenants under its line of credit and other factors, the report of the
Company's auditors states that there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements
have been prepared assuming the Company will continue as a going concern and do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
this uncertainty.
The amount and timing of the working capital requirements of the Company and
the Company's ability to continue as a going concern will be determined by
numerous factors, including the level of gross margin on future sales, the
outcome of outstanding contingencies and disputes including pending lawsuits,
payment terms achieved by the Company and the timing of capital expenditures.
There can be no assurance that borrowings under the Company's revolving credit
agreement will remain available or that borrowings available under the Company's
revolving credit agreement together with the Company's other anticipated sources
of working capital will be sufficient to meet the Company's other working
capital requirements.
The Company has retained investment banking counsel to advise and assist it
in evaluating methods of generating capital including the possible issuance of
additional equity securities and the possible sale of one or more business
segments. If the Company is unable to obtain sufficient funds to satisfy its
cash requirements, it could be forced to curtail operations, dispose of assets
or seek extended payment terms from its vendors. There can be no assurance that
the Company would be able to reduce expenses or successfully complete other
steps necessary to continue as a going concern.
F-19
<PAGE>
NOTE 16--STOCK EXCHANGE LISTING REQUIREMENTS
The Nasdaq Stock Market, Inc. and the Toronto Stock Exchange have notified
the Company of possible action to remove the Company's listing from their
respective stock exchanges. The Ontario Securities Commission has also issued a
cease trading order. Such actions could restrict marketability of the Company's
common stock.
F-20
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
Geographics, Inc.
We have audited the consolidated financial statements of Geographics, Inc. as of
March 31, 1997 and 1996 and for each of the three years in the period ended
March 31, 1997, and have issued our report thereon dated August 26, 1997; such
financial statements and report are included elsewhere in this Form 10-K. Our
audits also included the financial statement schedules of Geographics, listed in
Item 14. These financial statements schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Moss Adams LLP
Bellingham, Washington
August 26, 1997
S-1
<PAGE>
SCHEDULE II
GEOGRAPHICS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
DEDUCTIONS BALANCE AT
BALANCE AT ------------------------------ MARCH 31 ALL
YEAR ENDED MARCH 31 APRIL 1 ADDITIONS COLLECTIONS WRITE-OFFS CURRENT
- ------------------------------------------- ---------- ---------- ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts, Sales
Returns and Cash Discounts
1997....................................... $ 146,926 772,221 104,306 $ 814,841
1996....................................... Amounts not material for reporting purposes
1995....................................... Amounts not material for reporting purposes
Allowance for Obsolete Inventory
1997....................................... $ 100,000 1,190,000 $ 1,290,000
1996....................................... Amounts not material for reporting purposes
1995....................................... Amounts not material for reporting purposes
</TABLE>
S-2
<PAGE>
EXHIBIT 10.1
[Logo]
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal: Loan Date: Maturity: Loan No: Call: Collateral: Account: Office: Initials:
$12,000,000.00 02-13-1996 07-25-1997 798-75 385 3208662005 44165
References in the shaded area are for Lender's use only and do not limit the
applicablity of this document to any particular loan or item.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Borrower: GEOGRAPHICS, INC. Lender: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
1555 ODELL ROAD NORTH CASCADES/OLYMPIC BUSINESS BANKING TEAM
BLAINE, WA 98231 C/D 1420 5TH AVE.
WWH 470
SEATTLE, WA 98101
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THIS BUSINESS LOAN AGREEMENT between GEOGRAPHICS, INC. ("Borrower") and
U.S.BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Lender") is made and executed
on the following terms and conditions. Borrower has received prior commercial
loans from Lender or has applied to Lender for a commercial loan or loans and
other financial accommodations, including those which may be described on any
exhibit or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) In granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgement and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of February 13, 1996, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in the Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
BORROWER. The word "Borrower" means GEOGRAPHICS, INC.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1960, as amended.
CASH FLOW. The words "Cash Flow" mean net Income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional gain, trust receipt, loan, lien or lien retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law, contract,
or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without Limitation
each and all of the guarantors, sureties and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The Word "Indebtedness" means and includes without
limitation all Loans together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated, whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise, whether
recovery upon such indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such indebtedness may be or
hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, its successors and assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrowers receivables.
LOAN. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents
whether now or hereafter existing, executed in connection with the
indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a
loan, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, loan or title retention contract, lease or consignment
intended as a security device, or any other security or loan interest
whatsoever, whether created by law, contract or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to Indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e.,goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender
as of the date of this Agreement and as of the date of each disbursement of
Loan proceeds;
ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing and in good standing under the laws of the State of
Washington. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all
states in which the failure to so qualify would have a material adverse
effect on its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duty authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental body;
and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organisation, or bylaws, or any agreement or other instrument binding upon
Borrower or (b) any law,
<PAGE>
Page 2
BUSINESS LOAN AGREEMENT
(Continued)
02-13-1996
Loan No 788-75
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender duly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and
as accepted by Lender, and except for property taxation for taxes not
presently due and payable, BORROWER owns and has good title to all of
Borrower's proportions free and clear of all Security interests, and has
not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrowers
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The term "Hazardous waste", "hazardous substance",
"disposal", "release" and "threatened releases" as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,"
"SARA", the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C.
Section 6901, et seq., or other applicable state or Federal Laws, rules,
or regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower represents
and warrants that (a) During the period of Borrower's ownership of the
properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous
waste or substance by any person on, under, or about any of the
properties. (b) Borrower has no knowledge of, or reason to believe that
there has been (i) any use, generation, manufacture, storage, treatment,
disposal,release, or threatened release of any hazardous waste or
substance by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any
person relating to such matters. (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the property shall
use, generate, manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, or about any of the properties;
and any such activity shall be conducted in compliance with all
applicable federal, state and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances
described above. Borrower authorizes Lender and its agents to enter upon
the properties to make such Inspections and tests as Lender any deem
appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the propertiesfor hazardous waste. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain
or suffer resulting from a breach of this section of the Agreement or as
a consequence of any use, generation, manufacture, storage, disposal,
release or threatened release occurring prior to Borrower's ownership or
interest in the properties, whether or not the same was or should have
been known to Borrower. The provision of this section of the Agreement,
including the obligation to indemnify, shall survive the payment of the
indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of
the properties, whether by foreclosure or otherwise.
<PAGE>
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events,
if any, that have been disclosed to and acknowledged by Lender in
writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
are binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance
with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, and (iii) no steps have been taken to
terminate any such plan.
LOCATION OF BORROWER'S OFFICES AND RECORDS. The chief place of business
of Borrower and the office or offices where Borrower keeps his records
concerning the Collateral is located at 1588 ODELL ROAD, BLAINE, WA
98231.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and
agrees that Lender is relying upon the above representations and
warranties in extending Loan Advances to Borrower. Borrower further
agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until
such time as Borrower's Loan and Note shall be held in full, or until
this Agreement shall be terminated in the manner provided above,
whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all litigation and
claims and all threatened litigation and claims allocating Borrower or
any Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
<PAGE>
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in
no event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than forty five (45) days after
the end of such fiscal quarter, Borrower's balance sheet and profit and
loss statement for the period ended, prepared and certified as correct
to the best knowledge and belief by Borrower's chief financial officer
or other officer or person acceptable to Lender. All financial reports
required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not
less than $0,535,000,00.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 2.00 to 1.00.
CURRENT RATIO. Maintain a ratio of Current Assets to Current
Liabilities in excess of 1.25 to 1.00.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement, the term "Tangible Net Worth" shall mean
Borrower's total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible forms, but including leaseholds and leasehold improvements)
less total Debt. The term "Debt" shall mean all of Borrower's
liabilities excluding Subordinated Debt. The term "Subordinated Debt"
shall mean indebtedness and liabilities of Borrower which have been
subordinated by written agreement to indebtedness owned by Borrower to
Lender in form and substance acceptable to Lender. The term "Working
Capital" shall mean Borrower's current assets, excluding prepaid
expenses, less Borrower's current liabilities. The term "Liquid Assets"
shall mean Borrower's cash on hand plus Borrower's receivables. The
term "Cash Flow" shall mean net income after taxes, and exclusive of
extraordinary gains and losses, plus depreciation and armoritization.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied on a
combined basis, and certified by Borrower as being true and correct.
<PAGE>
02-13-1996 BUSINESS LOAN AGREEMENT Page 3
Loan No 708-75 (Continued)
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INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages and
with insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without
at least ten (10) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or
default of Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security interest
for the Loans, Borrower will provide Lender with such loans payable or
other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property values
on the basis of which insurance has been obtained, and the manner of
determining those values; and (f) the expiration date of the policy. In
addition, upon request of Lender (however not more often than annually),
Borrower will have an independent appraiser satisfactory to Lender
determine, as applicable, the actual cash value or replacement cost of
any Collateral.
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, on Lender's terms, and in
the amounts and by the guarantors named below:
Guarantors Amounts
---------- ---------
GEOGRAPHICS MARKETING CANADA Unlimited
MARTIN DISTRIBUTING LTD Unlimited
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrowers business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any of
Borrower's properties, income, or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of the
assessments, taxes, charges, levies, liens and claims and will authorize
the appropriate governmental official to deliver to Lender at any time a
written statement of any assessments, taxes, charges, levies, liens and
claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in all other instruments and
agreements between Borrower and Lender in a timely manner, and promptly
notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement.
OPERATIONS. Substantially maintain its present executive and management
personnel, conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and
municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with
all minimum funding standards and other requirements of ERISA and other
laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts, and
records and to make copies and memoranda of Borrower's books, accounts,
and records. If Borrower now or at any time hereafter maintains any
records (including without limitation computer generated records and
computer software programs for the generation of such records) in the
possession of a third party, Borrower, upon request of Lender, shall
notify such party to permit Lender free access to such records at all
reasonable times and to provide Lender with copies of any records it may
request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender NOT REQUIRED and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances, not cause or permit to
exist, as a result of an intentional or unintentional action or omission
on its part or on the part of any third party, on property owned and/or
occupied by Borrower, any environmental activity where damages may
result to the environment, unless such environmental activity is
pursuant to and in compliance with the conditions of a permit issued by
the appropriate federal, state or local governmental authorities; shall
furnish to Lender promptly and in any event within thirty (30) days
after receipt thereof a copy of any notice, summons, lien, citation,
directive, ledger or other communication from any governmental agency or
instrumentality concerning any intentional or unintentional action or
omission on Borrower's part in connection with any environmental
activity whether or not there is damage to the environment and/or other
natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorney's may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including
any request or policy not having the force of law) shall impose, modify or
make applicable any taxes (except U.S. federal, state or local income or
franchise taxes imposed on Lender), reserve requirements, capital adequacy
requirements or other obligations which would (a) increase the cost to Lender
for extending or maintaining the credit facilities to which this Agreement
relates, (b) reduce the amounts payable to Lender under this Agreement or the
Related Documents, or (c) reduce the rate of return on Lender's capital as a
consequence of Lender's obligations with respect to the credit facilities to
which this Agreement relates, then Borrow agrees to pay Lender such
additional amounts as will compensate Lender therefor, within five (5) days
after Lender's written demand for such payment which demand shall be
accompanied by an explanation of such imposition or charge and a calculation
in reasonable detail of the additional amounts payable by Borrower, which
explanation and calculations shall be conclusive in the absence of ____ error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
CAPITAL EXPENDITURES. Make or contract to make capital expenditures,
including leasehold improvements, in any fiscal year in excess of
$4,000,000.00 or incur liability for contents of property (including
both real and personal property) in an amount which, together with
capital expenditures, shall in any fiscal year exceed such sum.
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's
assets, or (c) sell with recourse any of Borrower's accounts, except to
Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c)
pay any dividends on Borrower's stock (other than dividends payable in
its stock), provided, however that notwithstanding the foregoing, but
only so long as to Event of Default has occurred and is continuing or
would result from the payment of dividends. If Borrower is a "Subchapter
S Corporation" (as defined in the Internal Revenue Code of 1933, as
amended). Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the
shareholders to pay income taxes and make estimated income tax payments
to satisfy their liabilities under federal and state law which also
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d)
purchase or retire any of Borrower's outstanding shares or alter or
amend Borrower's capital structure.
LOANS ACQUISITIONS AND GUARANTEES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower becomes insolvent,
files a petion in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's
financial condition in the financial condition of any Guarantor, or in the
value of any Collateral securing any loan; (d) any Guarantor books obtains
or otherwise attempts to limit, modify or revoke such Guarantor's guaranty
of the Loan or any other loan with Lender; or (e) Lender in good faith
<PAGE>
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02-13-1996 BUSINESS LOAN AGREEMENT Page 4
Loan No 798-75 (Continued)
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deems itself insecure, even though no Event of Default shall have occurred.
ACCESS LAWS. Without limiting the generality of any provision of this
agreement requiring Borrower to comply with applicable laws, rules, and
regulations, Borrower agrees that it will at all times comply with applicable
laws relating to disabled access including, but not limited to, all applicable
titles of the Americans with Disabilities Act of 1990.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
OTHER FINANCIAL RATIOS. CASH FLOW COVERAGE 1.25 TO 1 (NET PROFIT AFTER TAXES
PLUS INTEREST EXPENSE PLUS DEPRECIATION PLUS AMORTIZATION LESS DIVIDENDS LESS
UNFUNDED CAPITAL EXPENDITURES DIVIDED BY CURRENT PORTION LONG TERM DEBT PLUS
CURRENT PORTION CAPITAL LEASES PLUS INTEREST EXPENSE).
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however all IRA, Keogh,
and trust accounts. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness
against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower of any Grantor to comply with or to
perform when due any other form, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other form, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and extent (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Borrower.
CREDITOR OF FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor or Borrower, any
creditor of any Grantor against any collateral securing the indebtedness,
or by any governmental agency. This includes a garnishment, attachment,
or levy on or of any of Borrower's deposit accounts with Lender.
However, the Event of Default shall not apply if there is a good faith
dispute by Borrower or Grantor, as the case may be, as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves
of a surety bond for the creditor or forfeiture proceeding satisfactory
to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent or any Guarantor revokes any guaranty of the
Indebtedness. Lender, at its option, may, but shall not be required to,
permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
INSECURITY. Lender, in good faith, deems itself Insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months,
it may be cured (and no Event of Default will have occurred) if Borrower
or Grantor, as the case may be, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, as
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's option,
all Loan's immediately will become due and payable, all without notice of any
kind to Borrower, except that in the case of an Event of Default of the type
described in the "Insolvency" subsection above, such acceleration shall be
automatic and not optional.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
County, the State of Washington. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement.
This includes, without limitation, obtaining injunctive relief or a
temporary restraining order; invoking a power of sale under any deed of
trust or mortgage; obtaining a writ of attachment or imposition of a
receiver; or exercising any rights relating to personal property,
including taking or disposing of such property with or without judicial
process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or
reasonableness of any act, or exercise of any right, concerning any
Collateral, including any claim to rescind, reform, or otherwise modify any
agreement relating to the Collateral, shall also be arbitrated, provided
however that no arbitrator shall have the right or the power to enjoin or
restrain any act of any party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. Nothing in this
Agreement shall preclude any party from seeking equitable relief from a
court of competent jurisdiction. The statute of limitations, estoppel,
waiver, laches, and similar doctrines which would otherwise be applicable
in an action brought by a party shall be applicable in any arbitration
proceeding, and the commencement of an arbitration proceeding shall be
deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchases of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that other Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of
any holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses, including without limitation, attorneys' fees
incurred in connection with the preparation, execution, enforcement and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection concerns. Borrower also will pay any
court costs in addition to all other sums provided by law.
<PAGE>
02-13-1996 BUSINESS LOAN AGREEMENT Page 5
Loan No 798-75 (Continued)
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NOTICES. All notices required to be given under this Agreement shall be given
in writing and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, fist class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the notice is to change the
party's address. To the extent permitted by applicable law, if there is more
than one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower agrees to keep Lender informed at
all times of Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances, if feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity, however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in
all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery to
Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
FEBRUARY 13, 1996.
BORROWER:
GEOGRAPHICS, INC.
X /s/ Ronald S. Deans
----------------------------------
Authorized Officer CEO
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
By: /s/ Don Zimmerman
----------------------------------
Vice President
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<PAGE>
REVOLVING CREDIT ACCOUNTS RECEIVABLE/INVENTORY COLLATERAL
US BANK WILL GRANT REVOLVING CREDIT TO BORROWER UNDER THE FOLLOWING PROVISIONS:
COLLATERAL LINE LIMIT: $12,000,000
ACCOUNTS RECEIVABLE
ADVANCE RATE 80% OF ELIGIBLE ACCOUNTS
ELIGIBLE ACCOUNTS: / X / CURRENT - 90 DAYS DOI
/ X / CURRENT - 120 DAYS DOI ON NATIONAL
/ / STORES
INELIGIBLE ACCOUNTS
X ACCOUNTS WITH 25% OF OUTSTANDING AMOUNT OVER 90 DAYS DOI
X ACCOUNTS WITH 25% OF OUTSTANDING AMOUNT OVER 120 DAYS DOI ON NATIONAL
STORES
X ACCOUNTS DUE FROM OFFICERS, EMPLOYEES, AFFIL. COMPANIES AND INDIV.*
X ACCOUNTS SUBJECT TO SET OFF
X ACCOUNTS RESULTING FROM COD'S, FINANCE CHARGES AND CONSIGNMENT
X ACCOUNTS DUE FROM FOREIGN ENTITIES OR INDIVIDUALS*
X ACCOUNTS DUE FROM FEDERAL GOVERNMENT OR AGENCIES
X RETAININGS
X DATED BILLINGS
* Canadian Mega Store receivables of Geographics Marketing Canada, Inc.
will be allowed on a pre-approved basis.
INVENTORY
ADVANCE RATE 55% MAXIMUM AMOUNT $3,500,000
MAXIMUM AMOUNT $5,000,000 from 7-1-96
to 10-31-96
ELIGIBLE INVENTORY
X RAW MATERIAL 55% $ ALL
X WORK IN PROCESS 55% $ ALL
X FINISHED GOODS 55% $ ALL
OPERATING PARAMETERS
ADVANCE BASE BORROWERS CERTIFICATE: SEMI-MONTHLY
(FREQUENCY)
BANKCONTROL ACCOU X YES
AGINGS: A/P & A/R AGINGS DUE BY THE 20TH OF THE FOLLOWING MONTH
ANNUAL INSPECTIONS BY USBW/COLLATERAL SERVICES DEPARTMENT
US BANK OF WASHINGTON, N.A. GEOGRAPHICS, INC.
BY: /s/ Don Zimmerman BY: /s/ Ronald S. Deans
----------------------- -----------------------
TITLE: VP TITLE: CEO
----------------------- -----------------------
DATE: 2-14-96 DATE: 2-14-96
----------------------- -----------------------
<PAGE>
EXHIBIT 10.2
[LOGO]
PROMISSORY NOTE
<TABLE>
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$12,000,000.00 02-13-1996 07-25-1996 798-75 365 3208662005 44166
- ---------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
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</TABLE>
<TABLE>
<S> <C>
BORROWER: GEOGRAPHICS, INC. LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
1555 ODELL ROAD NORTH CASCADES/OLYMPIC BUSINESS BANKING TEAM
BLAINE, WA 98231 C/O 1420 5TH AVE.
WWH 470
SEATTLE, WA 98101
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- ---------------------------------------------------------------------------------------------------------
</TABLE>
PRINCIPAL AMOUNT: $12,000,000.00 DATE OF NOTE: FEBRUARY 13, 1996
PROMISE TO PAY, GEOGRAPHICS, INC. ("Borrower") PROMISES TO PAY TO U.S. BANK
OF WASHINGTON, NATIONAL ASSOCIATION ("Lender"), or order, in lawful money of
the United States of America, the principal amount of Twelve Million & 00/100
dollars ($12,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance.
Interest shall be calculated from the date of each advance until repayment of
each advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made, in
one payment of all outstanding principal plus all accrued unpaid interest on
July 25, 1996. In addition, Borrower will pay regular monthly payments of
accrued unpaid interest beginning March 10, 1996, and all subsequent interest
payments are due on the same day of each month after that. Interest on this
Note is computed on a 365/360 simple interest basis; that is, by applying the
ratio of the annual interest rate over a year of 360 days, multiplied by the
outstanding principal balance, multiplied by the actual number of days the
principal balance is outstanding. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is the LENDER'S PRIME
RATE. THIS IS THE RATE OF INTEREST WHICH LENDER FROM TIME TO TIME ESTABLISHES
AS ITS PRIME RATE AND IS NOT, FOR EXAMPLE, THE LOWEST RATE OF INTEREST WHICH
LENDER COLLECTS FROM ANY BORROWER OR CLASS OF BORROWERS (the "Index"). The
interest rate shall be adjusted without notice effective on the day Bank's
prime rate changes. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each DAY. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE WILL BE A RATE EQUAL TO THE INDEX. NOTICE: Under no circumstances
will the interest rate on this Note be more than the maximum rate allowed by
applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject
to refund upon early payment (whether voluntary or as a result of default),
except as otherwise required by law. Except for the foregoing, Borrower may
pay without penalty all or a portion of the amount owed earlier than it is
due. Early payments will not, unless agreed to by Lender in writing, relieve
Borrower of Borrower's obligation to continue to make payments of accrued
unpaid interest. Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due, (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to perform promptly at the
time and strictly in the manner provided in this Note or any agreement
related to this Note, or in any other agreement or loan Borrower has with
Lender, (c) Any representation or statement made or furnished to Lender by
Borrower or on Borrower's behalf is false or misleading in any material
respect, (d) Borrower becomes insolvent, a receiver is appointed for any part
of Borrower's property, Borrower makes an assignment for the benefit of
creditors, or any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency laws, (e) Borrower is in default
under any other note, security agreement, lease agreement or lease schedule,
loan agreement or other agreement, whether now existing or hereafter made,
between Borrower and U.S. Bancorp or any direct or indirect subsidiary of
U.S. Bancorp, (f) Any creditor tries to take any of Borrower's property on or
in which Lender has a lien or security interest. This includes a garnishment
of any of Borrower's accounts with Lender, (g) Any of the events described in
this default section occurs with respect to any guarantor of this note, (h)
Lender in good faith deems itself insecure.
If any default, other than a default in payment is curable and if Borrower
has not been given a notice of a breach of the same provision of this Note
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen
(15) days; or (b) if the cure requires more than fifteen (15) days,
immediately initiates steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 5.000
percentage points over the Index. The interest rate will not exceed the
maximum rate permitted by applicable law. Lender may hire or pay someone else
to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable
law, Lender's attorneys' fees and Lender's legal expenses whether or not
there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. If not prohibited by applicable law, Borrower also will pay any
court costs, in addition to all other sums provided by law. This Note has
been delivered to Lender and accepted by Lender in the State of Washington.
If there is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of King County, the State of Washington. Subject
to the provisions on arbitration, this Note shall be governed by and
construed in accordance with the laws of the State of Washington.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in an to, Borrower's accounts
with Lender (whether checking, savings, or some other account) including
without limitation all accounts held jointly with someone else and all
accounts Borrower may open in the future, excluding however, all IRA, Keogh,
and trust accounts. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any
and all such accounts.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advances under the line of credit until Lender receives from Borrower at
Lender's address shown above written notice of revocation of their
<PAGE>
02-13-1996 PROMISSORY NOTE PAGE 2
LOAN NO 798-75 (CONTINUED)
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- -------------------------------------------------------------------------------
authority: R.S. DEANS, CEO; TERRY A. FIFE, VP FINANCE/SECRETARY; R. SCOTT
DEANS, VP OPERATIONS; AND MARK G. DEANS, VP MARKETING. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with
Lender. The unpaid principal balance owing on this Note at any time may be
evidenced by endorsements on this Note or by Lender's internal records,
including daily computer print-outs. Lender will have no obligation to
advance funds under this Note if: (a) Borrower or any guarantor is in default
under the terms of this Note or any agreement that Borrower or any guarantor
has with Lender, including any agreement made in connection with the signing
of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan
with Lender; (d) Borrower has applied funds provided pursuant to this Note
for purposes other than those authorized by Lender; or (e) Lender in good
faith deems itself insecure under this Note or any other agreement between
Lender and Borrower.
ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES AND CONTROVERSIES
BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM
THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT
DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN
ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or
dispose of any collateral securing this Note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any collateral securing this Note, including
any claim to rescind, reform, or otherwise modify any agreement relating to
the collateral securing this Note, shall also be arbitrated, provided
however that no arbitrator shall have the right or the power to enjoin or
restrain any act of any party. Judgment upon any award rendered by any
arbitrator may be entered in any court having jurisdiction. Nothing in this
Note shall preclude any party from seeking equitable relief from a court of
competent jurisdiction. The statute of limitations, estoppel, waiver, laches,
and similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement of
an action for these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration provision.
PAYMENT BY AUTOMATIC DEDUCTION. Borrower hereby authorizes Lender to
automatically deduct the amount of all principal and/or interest payments on
this Note from Borrower's account number 1777-254457 with Lender or such other
account as Borrower may designate in writing. If there are insufficient funds
in the account to pay the automatic deduction in full, Lender may allow the
account to become overdrawn, or Lender may reverse the automatic deduction.
Borrower will pay all fees on the account which result from the automatic
deductions, including any overdraft/NSF charges. If for any reason Lender
does not charge the account for a payment, or if an automatic payment is
reversed, the payment is still due according to this Note. If the account is
a Money Market Account, the number of withdrawals from that account is
limited as set out in the account agreement. Lender may cancel the automatic
deduction at any time in its discretion.
LATE CHARGE. If a payment is 15 days or more past due, borrower will be
charged a late charge of 5% of the delinquent payment.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. Lender may delay or forgo
enforcing any of its rights or remedies under this Note without losing them.
Borrower and any other person who signs, guarantees or endorses this Note, to
the extent allowed by law, waive presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY
OF THE NOTE.
BORROWER:
GEOGRAPHICS, INC.
/s/ Ronald S. Deans
-------------------------------------------
CEO
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
By: /s/ Don Zimmerman
------------------------------------------
Vice President
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<PAGE>
Exhibit 10.3
LOAN AND SECURITY AGREEMENT
Dated: July 10, 1992,
Between: GEOGRAPHICS, INC., a Wyoming corporation ("Borrower"), whose address
is 1555 Odell Road, P.O. Box R1, Blaine, Washington 98230, and
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("Bank"), whose address
is N.W. Washington Business Banking, 1331 Commercial Street, P.O. Box
547, Bellingham, Washington 98227.
RECITALS
A. Borrower manufactures rub-on lettering at facilities in Blaine,
Washington, and sells its products throughout the United States and Canada.
B. Borrower desires to have (i) a $300,000 equipment loan, (ii) a
$1.2 million real estate loan, and (iii) a $1 million revolving line of credit
for payment of ordinary and necessary operating costs and expenses.
C. Bank is willing to provide the above-described loans and credit
extensions on the terms and conditions of this agreement.
NOW, THEREFORE, for value, Borrower and Bank hereby agree as follows:
1. LOANS AND CREDIT EXTENSIONS.
(a) EQUIPMENT LOAN. Bank hereby promises and agrees to make an
"equipment loan" to Borrower on the terms and conditions stated in this
agreement in an amount equal to the lesser of (i) $300,000, or (ii) 85 percent
of the liquidating value of the equipment owned by Borrower on the date of this
agreement (as estimated by Bank's Equipment Appraisal Department) net of all
debts and liabilities secured by senior liens or security interests covering the
equipment or any item thereof or interest therein. Bank's commitment to make
the equipment loan will expire on July 31, 1992, unless the conditions precedent
are satisfied (or waived by Bank) and the loan is funded on or before that date.
If made, Borrower promises and agrees to repay the equipment loan and
to pay interest, fees and costs without offset, defense or counterclaim to
Bank's order or assigns at the above address (or such other address as Bank may
hereafter specify) as follows:
(i) Principal will be repaid in 60 equal monthly installments
starting on the 10 day of the first calendar month immediately following
the calendar month in which the loan is made, and continuing on the same
day of each and every calendar month thereafter until the loan is paid in
full.
- 1 -
<PAGE>
(ii) Interest will accrue on the outstanding principal balance of the
equipment loan from the date the loan is made until repaid at a fully
fluctuating rate of interest equal to Bank's publicly announced prime rate
of interest plus a margin of 1.25 percent per annum. Interest will be paid
monthly in arrears at the same time and in the same manner as principal is
paid.
(iii) Borrower will pay a fee to Bank at the time the equipment loan
is made which will be in an amount determined by multiplying the principal
of the equipment loan by 1 percent.
(iv) Borrower will execute and deliver to Bank a note in a form
prescribed by Bank to further evidence Borrower's obligation to repay the
equipment loan and to pay interest, fees and costs in accordance with the
terms of this agreement; provided, however, that the terms and conditions
of this agreement shall control over any inconsistent term or condition in
that note. The note also will provide for reasonable attorney fees and
other collection costs as specified below.
(b) REAL ESTATE LOAN. Bank hereby promises and agrees to make a
"real estate loan" to Borrower on the terms and conditions stated in this
agreement in an amount equal to the lesser of (i) $1.2 million or (ii) 75
percent of the appraised value of the buildings, improvements, fixtures and
approximately 10 acres of land located at 1555 Odell Road, Blaine, Whatcom
County, Washington ("real estate"). Bank's commitment to make the real estate
loan will expire on July 31, 1992, unless the conditions precedent are satisfied
(or waived by Bank) and the loan is funded on or before that date.
If the real estate loan is made, Borrower promises and agrees to repay
the real estate loan and to pay interest, fees and costs without offset, defense
or counterclaim to Bank's order or assigns at the above address (or such other
address as Bank may hereafter specify) as follows:
(i) Principal and interest will be repaid in 59 equal monthly
installments (based on a repayment term of 180 months) starting on the 1st
day of the first calendar month immediately following the calendar month in
which the loan is made, and continuing on the same day of each and every
calendar month thereafter until the fifth anniversary of the date the loan
was made when the entire unpaid balance of the real estate loan will be
immediately due and payable regardless of the installment program
previously in effect.
(ii) Interest will accrue on the outstanding principal balance of the
real estate loan from the date the loan is made until repaid at a fixed
rate of interest equal to the average of the weekly yields on United States
Treasury Securities--Constant Maturity Series for the four weeks preceding
the loan funding date as published in the Federal Reserve Statistical
Release H.15 (519) last released before the funding date plus a margin of
3.5 percent per annum and adjusted to include the cost to Bank of any
required reserves and FDIC insurance premiums,
- 2 -
<PAGE>
will be paid monthly in arrears, and will be included in the monthly
installment amount.
(iii) Borrower will pay a fee to Bank at the time the real estate
loan is made which will be in an amount determined by multiplying the
principal of the real estate loan by 1 percent.
(iv) Borrower will execute and deliver to Bank a note in a form
prescribed by Bank to further evidence Borrower's obligation to repay the
real estate loan and to pay interest, fees and costs in accordance with the
terms of this agreement; provided, however, that the terms and conditions
of this agreement shall control over any inconsistent term or condition in
that note. The note also will provide for reasonable attorney fees and
other collection costs as specified below. Borrower will secure payment of
the real estate loan by executing and delivering to Bank an insured
first-priority deed of trust (including security agreement and assignment
of leases and rents) covering the real estate and all leases, rents,
issues, profits, and other proceeds thereof.
(c) LINE OF CREDIT. Bank hereby promises and agrees to make loans
(commonly known as "advances") to Borrower under a revolving line of credit
on the terms and conditions stated in this agreement from time to time until
July 30, 1993 (the "maturity"), as long as (i) the aggregate amount of all
advances outstanding under the line of credit and the amount to be advanced
do not at any one time exceed the lesser of $1 million (the "line limit") or
the "borrowing base" (80 percent of Borrower's eligible accounts plus the
lesser of 40 percent of Borrower's eligible inventory or $500,000) and (ii)
no event of default or incipient default exists at the time the advance is
requested or made. Subject to the foregoing limitations, Borrower may borrow
and repay advances at any time and from the time to time without penalty or
premium because of the revolving nature of this commitment.
Borrower will deliver a written certificate, manually signed by a
duly authorized officer of Borrower, to Bank on the 10th and 25th day of each
calender month. The certificate will specify the amounts of eligible
accounts and eligible inventory, the borrowing base, and the unused portion
of the line of credit (i.e., the line limit minus outstanding advances) as
of, respectively, the 1st and 15th days of that month. This certificate will
be deemed to be a representation that, to the best of the officers knowledge
after due inquiry, that the amounts specified are true and correct and that
no event of default or incipient default exists as of the date of the
certificate unless the certificate discloses that a default or incipient
default exists and contains an identification with reasonable particularity
of the event or events of defaults or incipient default. Bank will have no
obligation to make advances by honoring checks or otherwise in the event of a
default or incipient default whether or not such default or incipient default
is disclosed by the certificate.
Borrower will receive advances on the line of credit by Bank honoring
checks or other disbursement items, such as wire transfers, drawn on Borrower's
general checking account at Bank's branch in Blaine, Washington, which are
payable to third persons. When such items
- 3 -
<PAGE>
are presented for payment, Bank will honor (make payment on account of) such
items to the full extent of the remaining line limit or the remaining
borrowing base, whichever is less, unless an event of default or incipient
default has occurred and has not been cured. In the event Bank determines
that Bank is not required to honor an item, Bank will notify Borrower of its
intent to dishonor an item before it actually dishonors in order to give
Borrower the opportunity to cure the event of default or incipient default or
to fund the item from other sources.
Borrower promises and agrees to repay all advances made to
Borrower under the line of credit and to pay interest, fees and costs as herein
provided without offset, defense or counterclaim to Bank's order or assigns at
the above address or such other address as Bank may hereafter specify as
follows:
(i) All advances must be repaid on or before the maturity, may be
repaid at any time without notice or penalty, and must be repaid at any
time that Borrower's certificate indicates that the balance of outstanding
advances exceeds the lesser of the line limit or the borrowing base.
(ii) Interest will accrue on the outstanding balance of advances from
the date of an advance until repaid at a fully fluctuating rate of interest
equal to Bank's publicly-announced prime rate of interest plus a margin of
1 percent per annum and will be paid in arrears monthly on or before the
last date of each calendar month and at the maturity.
(iii) Borrower will pay a fee of $3,750 to Bank at the time this
agreement is executed by Bank.
(iv) Borrower will execute and deliver to Bank a note in a form
prescribed by Bank to further evidence Borrower's obligation to repay
advances made under the line of credit and to pay interest, fees and costs
in accordance with the terms of this agreement; provided, however, that the
terms and conditions of this agreement shall control over any inconsistent
term or condition in that note. The note also will provide for
reasonable attorney fees and other collection costs as specified below.
(d) ALLOWED USES. The proceeds of the equipment loan and the real
estate loan and the proceeds of the first advance under the line of credit
will be used by Borrower only to satisfy Borrower's existing debts,
liabilities and obligations to Hongkong Bank of Canada and to obtain
terminations of any encumbrances, security interests or liens that that
organization may have in Borrower's assets. All further advances under the
operating line will be used only for ordinary and necessary commercial,
investment or business purposes. Without limiting the generality of the
foregoing, Borrower represents that none of those proceeds will be used to
acquire any "margin stock" as that term is used in Regulation U of the
Federal Reserve Board.
(e) GENERAL MATTERS. Borrower acknowledges that the use of the term
"prime rate" is merely convenient reference to a commonly used term and is not
an express or implied
- 4 -
<PAGE>
representation or warranty that such rate is the best or lowest rate
available to Bank's most creditworthy customers. Borrower also acknowledges
and agrees that the phrase "per annum" means an annual period of 360 days
which results in an actual rate of interest slightly higher than the nominal
rate.
All payments will be deemed to have been made only when Bank has
actually received collected and unrestricted funds at the address specified
for payment. In the event that the date specified for a payment is not a
banking day, then interest shall accrue to and the payment shall be made on
the next following banking day.
Borrower waives acceptance, presentment, demand, protest, dishonor and
notice of any of the foregoing.
Bank may forbear with respect to default or covenant failures, extend
the maturity of any loan or credit extension one or more times, and modify
the interest rates or payment terms in connection with an extension, renewal
or restructure without affecting the liability of Borrower. Bank's
forbearance or other failure to exercise any right or remedy upon Borrower's
default shall not constitute a waiver or grounds for the claim of estoppel
with respect to the default or the term involved while such default continues
or in connection with any future default.
If any payment is not made within 10 banking days following the due
date for such payment, the Bank may, but shall not be obligated to, increase
the interest rate payable on the payment to a rate which is 5 percent per
annum in excess of the rate that otherwise would be applicable and such rate
shall continue in effect until the payment default is cured. This "default
rate" also will apply to the unpaid balance after maturity or acceleration.
If Bank engages an attorney to collect Borrower's debts (including VISA
card liabilities and checking account overdrafts) to Bank or to enforce or
construe the terms and conditions of this agreement, Borrower promises and
agrees to pay Bank's reasonable attorney fees and costs whether or not a
civil action, bankruptcy claim or proceeding or arbitration proceeding is
commenced, prosecuted to judgment, appealed or settled and to pay interest
thereon at the default rate from the date upon which payment in demanded by
Bank until payment is made by Borrower.
2. SECURITY AGREEMENT.
(a) GRANT OF SECURITY INTEREST. To secure payment and performance of
Borrower's present and future debts, liabilities and obligations to Bank,
Borrower hereby grants to Bank a security interest under Article 9 of the
Uniform Commercial Code in and to Borrower's present and future inventory,
accounts, equipment (including mobile goods, vehicles, rolling stock,
machinery, tools, furniture, furnishings, equipment which might be
classified as fixtures because of apparent method of affixation, accessories,
parts and accessions), instruments, chattel paper, documents, deposit
accounts, contract rights and general intangibles, and all products, proceeds
and records arising or related thereto (the "collateral").
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(b) FINANCING STATEMENTS. Borrower will execute and deliver to Bank
forms of financing statements deemed by Bank necessary or appropriate to
perfect, continue and reperfect Bank's security interest in the collateral.
Borrower's federal taxpayer identification number is 87-0305614.
----------
The original or a photocopy of this agreement without the original
signature of Borrower may be filed as a financing statement or a continuation
statement either by personal delivery or by facsimile machines. Borrower will
pay all fees and costs incurred by Bank in filing financing statements,
applications for certificates of title and like perfection documents and is
obtaining UCC lien searches confirming the priority of Bank's security
interest.
Borrower will immediately notify Bank of (i) any change in the name of
Borrower or Borrower's use of assumed business or trade names, (ii) the
relocation of its chief executive office or (iii) the transfer of inventory
into any states other than Washington (except transfers which are sales to
customers and other ordinary course transfers), so that Bank may file
additional financing statements or amendments to continue the prefected
status of
its security interest.
To the full extent allowed by law, Borrower appoints Bank as its
attorney in fact, coupled with an interest, for the limited purposes of
executing and filing financing statements and applications for certificate of
title and similar documents which may be in Bank's reasonable judgment
necessary or advisable for perfecting, continuing and reperfecting its
security interest in the collateral or any item thereof or interest therein.
(c) DEFINITIONS. "Account" or "account receivable" means any right to
payment for goods sold or leased or for services rendered which is not
evidenced by an instrument or chattel paper, whether or not it has been
earned by performance. "Eligible account" means an account receivable of
Borrower which is not subject to offset, defense or counterclaim, less than
60 days past due (90 days in the case of certain Super Store accounts
approved by Bank), owed by a non-affiliated account debtor located or
residing in the United States (or, if foreign, is supported by a letter of
credit acceptable to Bank) who is not to Borrower's knowledge insolvent or is
otherwise reasonably unacceptable to Bank and which does not result from
consignments or COD transactions. An account debtor which has more than 25
percent of its account more than 60 days past due is unacceptable to Bank.
"Inventory" means goods held by Borrower for sale or lease or to be furnished
under contracts of service, including raw materials, work in process,
materials used or consumed in Borrower's business and finished goods.
"Eligible inventory" means that the merchantable finished goods inventory and
raw materials of Borrower (but not work in process), but only to the extent
that the items thereof have been paid for and are not subject to any prior
lien, valued at the lower of cost or market value.
(d) CONSENT TO SALE OF COLLATERAL; NOTICE TO ACCOUNT DEBTORS; POSSESSION
AND DISPOSITION. Bank hereby consents to the sale of inventory for reasonably
equivalent value for cash or on ordinary trade terms and to collection of
accounts in the ordinary course of Borrower's business. Bank also consents to
the good faith compromise of accounts and disputes
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regarding defective or nonconforming inventory items and returns and rebates
in connection therewith. Bank's security interest shall extend to returned or
repossessed goods.
Upon the defaults of Borrower under this agreement, Bank is authorized to
notify account debtors of the grant of the security in the accounts and to
demand payment directly from the account debtors. Borrower acknowledges that
any payment by account debtors to Bank, rather than to Borrower, following
Borrower's default will constitute satisfaction of the account debtor's debt
to Borrower to the extent of the payment.
Upon Borrower's default under this agreement, Bank will be entitled to (a)
immediate possession any and all of the collateral, (ii) require Borrower to
enable the collateral and make it available to Bank at a place to be
designated by Bank which is reasonably convenient to Bank and Borrower and
(iii) to sell, lease or otherwise dispose of any or all of the collateral in
its then condition or following any commercially reasonable preparation or
processing. Borrower agrees that a letter delivered to Borrower at least 20
days before a public or private sale or other disposition is reasonable
notification of such sale or disposition.
3. CONDITIONS PRECEDENT.
The following are conditions precedent which must be satisfied by Borrower
or waived by Bank prior to the making of any loan or advance:
(a) CORPORATE DOCUMENTS. Borrower has delivered to Bank true and correct
copies of (i) its articles or restated articles of incorporation, including
all amendments thereto, (ii) its bylaws, including all amendments thereto,
(iii) a certificate of good standing/existence issued by the Wyoming
Secretary of State and dated within 15 days before the date of this
agreement, (iv) a certificate of qualification as a foreign corporation
issued by the Secretary of State of Washington and dated within 15 days
before the date of this agreement and (v) a copy of the resolutions adopted
by Borrower's board of directors authorizing Borrower to enter into and
perform its obligations under this agreement, including borrowing and the
specification of officers and employees who are authorized to request
advances, repayment and grant of encumbrance, security interest and lien,
duly certified as true, correct and in effect as of the date of this
agreement by the secretary or assistant secretary or Borrower.
(b) LOAN DOCUMENTS. Borrower has duly executed (i.e., signed and delivered
to Bank) by and through a duly authorized officer or officers this agreement,
the three notes required by this agreement, the deed of trust and related
documentation (including environmental questionaire and indemnity) and the
financing statements required by Bank to perfect its security interest
(collectively the "loan documents").
(c) APPRAISAL; SURVEY; INSURANCE. Bank has received in forms acceptable to
Bank (i) an appraisal of the real estate, (ii) a survey of the real estate
which identifies the boundaries of the real estate and the location of all
buildings, improvements and easements, and (iii) a policy or certificate of
fire insurance with extended coverage endorsement and with a lender's
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loss endorsement which allows recovery of insurance proceeds by Bank
regardless of any offsets, defenses or counterclaims by the insurer against
Borrower.
(d) DEED OF TRUST. Bank has recorded the deed of trust covering Borrower's
real estate in the Whatcom County mortgage records and a title insurance
company approved by Bank has issued to Bank an ALTA extended form loan policy
of title insurance insuring the validity and first priority of the deed of
trust as a lien against the real estate, subject only to current taxes and
assessments and such other matters of record as are reasonably acceptable to
Bank, including easements and restrictions which do not materially affect the
value or utility of the real estate, and containing such additional
endorsements as may be reasonably required by Bank.
(e) FINANCING STATEMENTS. Bank has filed financing statements executed by
Borrower in Washington to perfect its security interest in the collateral,
and the state filing office or a private lien search person has confirmed to
Bank that the security interest is first in time and right to the lien claims
and security interests of all persons other than such secured parties as Bank
may approve in writing including Whatcom State Bank (Pfainkoch Model VP450
Packaging Machine Serial 91-167) and SAFECO Credit Company, Inc. (Rosback 13
Bin Collator, Model CV913 and peripherals and 1963 Heidelberg 22 x 30-1/4"
SBG Cylinder Press, S/N 23249).
(f) REPRESENTATIONS; CONDITIONS; ADVERSE CHANGE. The representations and
warranties made by Borrower in this agreement to the best of Borrower's
knowledge are true, complete and correct in all material respects and
Borrower has satisfied all conditions imposed on it in any commitment letter
issued to it by Bank. There has been no material adverse change in the
financial condition or business prospects of Borrower since the date of the
latest financial statements provided to Bank. Borrower's chief executive or
financial officer has executed for Bank a certificate confirming the
foregoing.
(g) CONVERSION TO EQUITY OR SUBORDINATION. Borrower's shareholders have
converted approximately U.S. $500,000 in shareholder loans to equity
contributions or have executed a subordination agreement in a form prescribed
by Bank in which the shareholders agree that such debt will be subordinate to
Borrower's debts, liabilities and obligations to Bank. Such agreement will
allow Borrower to make ordinary course payments on account of the
subordinated debt prior to a default or incipient default under this
agreement.
4. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
(a) FORMATION. Borrower is a Wyoming corporation in good standing and has
duly qualified to transact business as a foreign corporation in Washington
and all other states where the nature of its business activities or the
ownership of property requires such qualification.
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(b) EXECUTION. The execution and performance of this agreement and
the related loan documents by Borrower have been duly authorized by all laws
relating to Borrower, by Borrower's corporate documents and by its board of
directors (and, if required by law or its corporate documents, by the holders
of its equity interests).
(c) AUTHORIZED SIGNERS. The loan documents have been duly
executed by officers of Borrower who have been duly authorized to perform
such acts.
(d) VALID, BINDING AND ENFORCEABLE. The loan documents are the
legally valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
(e) NO VIOLATION OR BREACH. The execution of the loan documents
and the performance by Borrower of its obligations hereunder and thereunder
do not violate any law applicable to Borrower or constitute a default or
breach of any contract to which Borrower is a party or by which its property
is bound.
(f) NO MATERIAL LITIGATION. There is no material litigation,
prosecution, investigation or other proceeding of any nature whatsoever
(specifically including those related to environmental matters) now pending
or, to the knowledge of Borrower, threatened involving Borrower or its
property except for those matters disclosed to Bank in writing before the
execution of this agreement by Bank.
(g) ACCURATE FINANCIAL INFORMATION. The financial, accounting and
business information provided by Borrower to Bank is true and correct in all
material respects and accurately presents the financial condition and
business organization and operations of Borrower as of the date of such
information.
(h) NO DEFAULT. Borrower is not in default in the performance of
any material obligation to any third person except for those obligations
being contested by Borrower in good faith, by appropriate means and with an
adequate reserve being maintained for payment in the event of an adverse
outcome.
(i) COMPLIANCE WITH LAWS. Borrower is in compliance with all
applicable laws, the noncompliance of which would be material to Borrower's
financial condition, business or property. Without limiting the generality of
the foregoing, Borrower is not now nor will it become a potentially
responsible party with respect to any vessel or site at which toxic or
hazardous substances, pollutants or contaminants ("hazardous wastes") have
been or may reasonably be anticipated to be released in reportable quantities
into the environment except for those matters disclosed to Bank in writing
prior to execution of this agreement by Bank. For the purposes of this
agreement, petroleum products, natural gas, friable and potentially friable
asbestos and polychlorinated biphenyls are classified as hazardous wastes.
(j) TAX RETURNS AND TAXES. Borrower has filed all tax returns
required by law to be filed and has paid all taxes and similar government
impositions when due except for those
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taxes and impositions being contested by Borrower in good faith, by
appropriate means and with an adequate reserve being maintained for payment
in the event of an adverse outcome.
(k) SOLVENCY. Borrower is not insolvent or the subject of any
insolvency proceeding. There has been no material adverse change in the
business, financial condition or property of Borrower since the date of the
last financial statements provided to Bank by Borrower.
Each time that Borrower requests an advance under the line of
credit, Borrower will be deemed to reaffirm the accuracy and completeness of
the foregoing representations and warranties in all material respects.
Borrower hereby agrees to indemnify, defend and hold harmless Bank from and
against any and all loss, liability, claim, cost or expense, including
damages, penalties, attorney fees and court costs, of any nature or kind
arising from or related to any error or omission in the foregoing
representations and warranties.
5. COVENANTS.
(a) AFFIRMATIVE COVENANTS. Borrower covenants that until all
loans and credit extensions are paid in full and all claims against Bank are
discharged:
(i) Borrower will preserve its legal status and franchises and pay
all taxes and annual fees in connection therewith.
(ii) Borrower will comply with all laws, specifically including,
but not limited to, all laws relating to the environment and to the
storage, transportation, disposal and release of hazardous wastes;
(iii) Borrower will obtain and maintain with responsible carriers
such worker's compensation, fire with extended coverage endorsement,
public liability and property damage and such other insurance in such
coverage amounts, deductibles and terms as may be consistent with
industry practices and as may be reasonably acceptable to Bank and will
provide evidence of such insurance to Bank as and when required by
Bank. The insurance policies covering collateral and the real estate
will include a lender's loss endorsement and will not be subject to
amendment or cancellation without providing at least 30 days' prior
written notice thereof to Bank.
(iv) Borrower will pay and perform when due all material
obligations to all third persons except for those obligations being
contested by Borrower in good faith, by appropriate means and with
an adequate reserve being maintained for payment in the event of an
adverse outcome.
(v) Borrower will file all tax returns required by law to be filed
and will pay all taxes and similar government impositions when due
except for those taxes and impositions being contested by Borrower in
good faith, by appropriate means
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and with an adequate reserve being maintained for payment in the event of an
adverse outcome.
(vi) Borrower will provide to Bank reasonably detailed financial
statements (including on a comparative basis balance sheets and related
statements of income and expenses, and at fiscal year-end changes in cash
position with related footnotes and comments) prepared in accordance with
generally accepted accounting principles and practices consistently applied
("GAAP") except where specifically agreed otherwise:
(A) within 45 days following the end of each of the first three fiscal
quarters as of the end of that quarter and for that portion of Borrower's
fiscal year then ended, and
(B) within 120 days following the end of the fiscal year (March 31) as
of the end of that fiscal year and for the fiscal year then ended and audited
by a certified public accounting firm of national or regional reputation (or
as may otherwise be approved in writing by Bank in advance) and not
containing any significant qualification by such accounting firm.
Bank shall have the right to inspect all of Borrower's financial records
(including, but not limited to, records relating to collateral and accounts
payable), in whatever form such records are stored, at all reasonable times
and to discuss with Borrower's accounting employees and outside accountants
such records and the financial statements provided to Bank. Bank will give
prior notice to Borrower of its intention to discuss such matters with
Borrower's outside accountants so as to provide the opportunity to Borrower
to be present at such discussions.
(vii) Borrower will provide to Bank such additional information as may be
required to keep Bank currently and completely informed as to all material
matters involving the business, financial condition and property of Borrower,
including pending and threatened litigation and other governmental
proceedings. Without limiting the generality of the foregoing, Borrower will
provide to Bank (A) monthly accounts receivable and payable aging reports
with such base information, documents and data as Bank may request, (B)
quarterly compliance certificates as and when the quarterly financial
statements are provided, and (C) annual business forecasts and projections
within 45 days following the end of Borrower's fiscal year. The compliance
certificates will be signed by the chief executive or financial officer of
Borrower and will state either that there is no default by Borrower under the
agreement to the knowledge of the signing officer after due inquiry or that a
default or defaults exists and, if there is a default or defaults, the
certificate also shall specify such default(s) with reasonable particularity
and shall specify Borrower's plan for cure of the defaults within a reasonable
period of time.
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<PAGE>
(b) FINANCIAL COVENANTS. Borrower covenants that at all times until
all loans and credit extensions have been paid in full and all claims against
Bank are discharged, Borrower will maintain:
(i) a tangible net worth (assets (other than the account of Martin
Distribution, Inc.) minus liabilities other than debt subordinated to Bank)
of not less than $2,750,000.
(ii) working capital of at least $1,800,000
(iii) a current ratio (current assets to current liabilities) of at
least 2 to 1.
(iv) a capital ratio (debts to tangible net worth) of no more than
2 to 1.
(v) cash flow coverage (net income plus interest expense and
depreciation to interest expense and the current portion of long-term debt
interest expense) of at least 1.25 to 1.
(c) NEGATIVE COVENANTS. Borrower covenants that until all loans
and credit extensions have been paid in full and all claims against Bank are
discharged:
(i) Borrower will not directly or indirectly "transfer" (sell,
lease, assign or otherwise dispose of or create or allow the imposition
of any new lien against) any material part of its assets except for
sales of inventory and collection of accounts in the ordinary course of
business and liens to secure additional debts which are allowed under
the terms of this agreement.
(ii) Without Bank's prior written consent, Borrower will not
directly or indirectly purchase or otherwise acquire an interest in any
third person, become liable for additional debts, form any subsidiary or
make any loan, advance or other payment to any third person in any
fiscal year except for purchases of supplies and raw materials,
purchases and leases of capital items not in excess of $350,000 in any
fiscal year, and open account credit of up to $500,000 extended to
Borrower's Canadian affiliate, Martin Distribution, Inc.
6. DEFAULT.
Time is of the essence. Borrower shall be in default under this
agreement if Borrower (a) fails to make any payment (principal, interest,
fees or costs and expenses) required by this agreement within five days
following the due date thereof, (b) fails to pay any other debt or liability
or perform any other obligation owned to Bank within applicable grace
periods, (c) makes an untrue statement of any material fact or omits to state
a material fact necessary in order to make the statements made, in light of
the circumstances under which they are made, not misleading, (d) uses loan
proceeds for a purpose or purposes not specified in this agreement or
otherwise approved by Bank in advance, (e) fails to comply with any of
material obligation,
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<PAGE>
other than payment, under this agreement within 20 banking days following the
date such compliance is required by this agreement, (f) is insolvent, becomes
the subject of any insolvency proceeding or becomes a judgment debtor for
more than $500,000 unless such liability is either covered by insurance or
bonded in connection with an appeal, or (g) bank in good faith believes that
there has been any other material adverse change in Borrower's financial
condition or business prospects.
7. REMEDIES.
In the event of Borrower's default, Bank may, but shall not be
obligated to, immediately accelerate (declare immediately due and payable)
all loans and credit extensions made under this agreement without notice or
prior demand and may, whether or not this agreement is accelerated,
immediately proceed with the exercise of all rights and remedies that Bank
may have against Borrower and/or the collateral in such order and by such
proceedings as Bank may select. All debts, liabilities and obligations of
Borrower to Bank under or pursuant to this agreement will be automatically
accelerated in the event of insolvency or the commencement of an insolvency
proceeding by or against Borrower. All rights and remedies of Bank are
cumulative and not exclusive and the commencement or partial exercise of any
such right or remedy shall not preclude Bank from the exercise of any other
right or remedy until all loans and credit extensions made under this
agreement are paid in full. Bank's rights specifically include the right of
set off against any obligations owed by Bank to Borrower against Borrower's
obligations to Bank.
Subject to any applicable statute of limitation, any controversy
(claim, offset, defease or counterclaim arising in either contract or tort)
arising out of or relating to this instrument or agreement may be settled by
binding arbitration in Seattle, Washington, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, as supplemented by
applicable law, and judgment upon the award rendered by the arbitrator (a)
may be entered in any court having jurisdiction thereof. One arbitrator and
the expedited procedures of such roles will be used in cases involving claims
and counterclaims of $250,000 or less. In all other cases, three arbitrators
and the general rules will be used. In all cases, each arbitrator will be
neutral and an active member of the Washington State Bar. This right to
arbitration will not prevent or delay Bank's rights to foreclose in the event
of default.
8. PARTICIPATION.
Bank shall have the unconditional right to sell participation
interests in this agreement.
9. BORROWER ASSIGNMENT.
Borrower shall NOT have the right to assign its rights or
obligations under this agreement and the related loan documents and any
attempted assignment also shall be a default by Borrower under this agreement.
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<PAGE>
10. SUCCESSORS AND ASSIGNS.
Subject to the foregoing restrictions on Borrower assignment, this
agreement and the related loan documents shall bind and inure to the benefit of
the respective successors and assigns of Borrower and Bank.
11. GOVERNING LAW.
Borrower and Bank have selected Washington law, except for any of its
choice of law provisions which would make the law of another jurisdiction
applicable to this agreement, to govern the construction and enforcement of this
agreement.
12. JURISDICTIONAL CONSENT.
Borrower hereby submits to the jurisdiction of any state or federal
court sitting in Seattle, Washington, in any action or proceeding relating to
this agreement and the related loan documents and the collateral, and hereby
waives any claim that such a forum is inconvenient or that there is a more
convenient forum.
13. PARTIAL INVALIDITY.
If any term of this agreement or the related loan documents is
hereafter determined to be illegal or unenforceable, that term will be deemed
deleted without invalidating the remaining terms and, to the fullest extent
permitted by law, Borrower hereby waives any provision of law which renders any
term illegal or unenforceable. In the event that (i) the amount of interest and
fees payable by Borrower is later determined to be usurious and (ii) Borrower is
not prohibited from pleading the defense of usury or maintaining any action
thereon or therefor, any such interest in excess of the maximum allowable rate
automatically shall be deemed to have been applied to principal.
14. DEFINITIONS; INTERPRETATIVE AIDS.
(a) DEFINITIONS. As used in this agreement:
"Affiliate" means a person that directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, another person through the ownership of equity interests, relationship,
control, management of property or otherwise.
"Banking day" means a day, other than a Saturday, on which Bank is
open to the public its main branch for carrying on substantially all of its
banking functions.
"Contract" means indenture, agreement, contract, lease, instrument and
like documents evidencing contractual rights and obligations.
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<PAGE>
"Control" means the direct or indirect power to direct the management
and policies of a person, or the use or disposition of that person's property,
whether through the ownership of equity interests, contract or otherwise.
"Debt" means a liability for borrowed money.
"Good faith" means honesty in fact in the conduct or transaction
concerned.
"Governmental unit" means the United States, any foreign state or
nation, or any state, commonwealth, district, territory, agency, department,
subdivision, court, tribunal or other instrumentality thereof.
"Incipient default" means a default but for the giving of notice or
the passage of time, including any applicable cure period.
"Insolvency proceeding" means an assignment for the benefit of
creditors or other proceeding intended to liquidate or rehabilitate the estate
of the person involved, including a state court receivership involving all or
substantially all of a person's property as well as any liquidation or
reorganization proceeding under the Bankruptcy Code.
"Insolvent" means a financial condition such that either the person's
total liabilities are greater than the fair value of all of the person's
property or the person is unable to pay its liabilities in the ordinary course
of business as they become due.
"Law" means any existing or future ordinance, statute, rule,
regulation, order, injunction, writ or decree of any government or any
subdivision or agency thereof, including amendments to any such law. Without
limiting the generality of the foregoing, laws includes the Internal Revenue
Code of 1986 (the "IRC"), the Employee Retirement Income Security Act of 1974
("ERISA"), the Fair Labor Standards Act ("FLSA"), the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Resource
Conservation and Recovery Act of 1976 ("RCRA") and the National Environmental
Policy Act ("NEPA").
"Liabilities" means monetary obligations whether reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, disputed, undisputed,
legal equitable, secured or unsecured.
"Lien" means a charge against or an interest in property to secure
payment or performance of an obligation, including an encumbrance against real
estate or security interest in tangible or intangible personal property obtained
by contract, such as a mortgage, deed of trust, security agreement, pledge
agreement or assignment, as well as by judgment, levy, sequestration or other
legal or equitable process or proceeding.
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<PAGE>
"Material" means that which in reasonable and objective contemplation
will or realistically is likely to affect the decision, business or property
of a person, or the person's credit worthiness as to such business or
property, in a significant manner.
"Obligation" means a duty imposed on a person by law, promise, contract
or otherwise, including a liability and a debt.
"Organization" means a corporation, government or governmental
subdivision or agency, business trust, estate, trust, partnership or
association, two or more persons having a joint or common interest, or any
other legal or commercial entity.
"Person" means an individual or an organization.
"Records" means correspondence, memoranda, tapes, computer data bases
and operating systems, papers, books and other documents, specifically
including, but not limited to, appraisal information, invoice and billing
information, accounts aging analyses, inventory calculations and valuations.
"Subsidiary" means an affiliate of a person which is controlled by that
person directly or indirectly through one or more intermediaries.
(b) INTERPRETATIVE AIDS. Accounting terms not specifically defined in
this agreement shall be defined or interpreted and all accounting procedures
will be performed in accordance with GAAP unless Bank consents in advance to
a different procedure.
Legal terms not specifically defined in this agreement shall be
defined, if and to the extent necessary, in accordance with the definitions
provided by the Uniform Commercial Code and the Bankruptcy Code of the United
States before resorting to any other reference.
In this agreement, the singular includes the plural and vice versa and
the neuter includes the masculine and the feminine and vice versa.
15. INDEMNITY. Borrowed promises and agrees to indemnify, defend and
hold harmless Bank from and against all claims, loss, liability, fines,
penalties, cost and expense (including reasonable attorney fees) which in any
way arise from or relate to a material misrepresentation or omission by
Borrower, the failure of Borrower to perform its covenants or other
obligations under this agreement or Borrower's ownership or use of the
collateral and the real estate, including hazardous waste claims and
proceedings. This indemnity will survive payment or discharge of Borrower's
debts to Bank under this agreement.
16. COMPLETE AGREEMENT.
This agreement and the related loan documents are the complete and
final agreement of the parties relating to the loans and credit extensions to
be provided hereunder.
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The express terms and conditions of this agreement supersede are intended to
be exclusive and they replace all prior agreements and understandings whether
written or oral.
The terms and conditions of this agreement are intended to supplement
the terms and conditions of the related loan documents. However, in the event
of an express conflict between the terms or conditions of this agreement and
the terms and conditions of any related loan document, the terms and
conditions of this agreement will control over the conflicting terms of the
other document.
17. STATUTORY DISCLAIMER.
Under Washington law, an agreement, promise or commitment to lend money,
to otherwise extend credit, to forbear with respect to the repayment of any
debt or the exercise of any remedy, to modify or extend the terms under
which the creditor has lent money or otherwise extended credit, to release
any guarantor or cosigner, or to make any other financial accommodation
pertaining to the debt or other extension of credit must be in writing and be
signed by the creditor to be enforceable.
U.S. BANK OF WASHINGTON, GEOGRAPHICS, INC.
NATIONAL ASSOCIATION
By /s/ Don Zimmerman By /s/ Ronald S. Deans
-------------------------------- --------------------------------
Don Zimmerman C.E.O.
Vice President
By /s/ Scott Davis
--------------------------------
Secretary
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[LOGO] KeyCorp Leasing Ltd.
EXHIBIT 10.4
MASTER EQUIPMENT LEASE AGREEMENT
THIS MASTER EQUIPMENT LEASE AGREEMENT dated as of May 22, 1996 is made
by and between KEYCORP LEASING LTD., a Delaware corporation with its
principal place of business at 54 State Street, Albany, New York 12207
("Lessor"), and GEOGRAPHICS, INC., a Wyoming corporation with its principal
place of business at 1555 Odell Road, Blaine, WA 98231 ("Lessee").
TERMS AND CONDITIONS OF LEASE
1. LEASE. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Equipment, subject to and upon the terms and conditions set forth
herein. Each Equipment Schedule shall constitute a separate and enforceable
lease incorporating all the terms and conditions of this Master Equipment
Lease Agreement as if such terms and conditions were set forth in full in
such Equipment Schedule. In the event that any term or condition of any
Equipment Schedule conflicts with or is inconsistent with any term or
condition of this Master Equipment Lease Agreement, the terms and conditions
of the Equipment Schedule shall govern.
2. DISCLAIMER OF WARRANTIES. LESSOR MAKES NO (AND SHALL NOT BE DEEMED
TO HAVE MADE ANY) WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN, OPERATION OR CONDITION
OR, OR THE QUALITY OF THE MATERIAL EQUIPMENT OR WORKMANSHIP IN, THE
EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE. THE
STATE OF TITLE THERETO OR ANY COMPONENT THERETO, THE ABSENCE OF LATENT OR
OTHER DEFECTS (WHETHER OR NOT DISCOVERABLE), AND LESSOR HEREBY DISCLAIMS THE
SAME; IT BEING UNDERSTOOD THAT THE EQUIPMENT IS LEASED TO LESSEE "AS IS" AND
ALL SUCH RISKS, IF ANY, ARE TO BE BORNE BY LESSEE. NO DEFECT IN, OR UNFITNESS
OF, THE EQUIPMENT, OR ANY OF THE OTHER FOREGOING MATTERS, SHALL RELIEVE
LESSEE OF THE OBLIGATION TO PAY RENT OR OF ANY OTHER OBLIGATION HEREUNDER.
LESSEE HAS MADE THE SELECTION OF THE EQUIPMENT FROM THE SUPPLIER BASED ON ITS
OWN JUDGMENT AND EXPRESSLY DISCLAIMS ANY RELIANCE UPON ANY STATEMENTS OR
REPRESENTATIONS MADE BY LESSOR. LESSOR IS NOT RESPONSIBLE FOR ANY REPAIRS,
SERVICE, MAINTENANCE OR DEFECT IN THE EQUIPMENT OR THE OPERATION THEREOF IN
NO EVENT SHALL LESSOR BE LIABLE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES (WHETHER UNDER THE UCC OR OTHERWISE), INCLUDING, WITHOUT LIMITATION,
ANY LOSS, COST OR DAMAGE TO LESSEE OR OTHERS ARISING FROM ANY OF THE
FOREGOING MATTERS, INCLUDING, WITHOUT LIMITATION, DEFECTS, NEGLIGENCE,
DELAYS, FAILURE OF DELIVERY OR NON-PERFORMANCE OF THE EQUIPMENT. ANY WARRANTY
BY THE SUPPLIER IS HEREBY ASSIGNED TO LESSEE BY LESSOR WITHOUT RECOURSE. SUCH
WARRANTY SHALL NOT RELEASE LESSEE FROM ITS OBLIGATION TO LESSOR TO PAY RENT,
TO PERFORM ALL OTHER OBLIGATIONS HEREUNDER AND TO KEEP, MAINTAIN AND
SURRENDER THE EQUIPMENT IN THE CONDITION REQUIRED BY SECTIONS 12 AND 13
HEREOF. Lessee's execution and delivery of a Certificate of Acceptance shall
be conclusive evidence as between Lessor and Lessee that the Items of
Equipment described therein are in all of the foregoing respects satisfactory
to Lessee, and Lessee shall not assert any claim of any nature whatsoever
against Lessor based on any of the foregoing matters; PROVIDED, HOWEVER, that
nothing contained herein shall in any way bar, reduce or defeat any claim
that Lessee may have against the Supplier or any other person (other than
Lessor).
3. NON-CANCELABLE LEASE. THIS LEASE IS A NET LEASE AND LESSEE'S
OBLIGATION TO PAY RENT AND PERFORM ITS OBLIGATIONS HEREUNDER ARE ABSOLUTE,
IRREVOCABLE AND UNCONDITIONAL UNDER ANY AND ALL CIRCUMSTANCES WHATSOEVER AND
SHALL NOT BE SUBJECT TO ANY RIGHT OF SET OFF, COUNTERCLAIM, DEDUCTION,
DEFENSE OR OTHER RIGHT WHICH LESSEE MAY HAVE AGAINST THE SUPPLIER, LESSOR OR
ANY OTHER PARTY. LESSEE SHALL HAVE NO RIGHT TO TERMINATE (EXCEPT AS EXPRESSLY
PROVIDED HEREIN) OR CANCEL THIS LEASE OR TO BE RELEASED OR DISCHARGED FROM
ITS OBLIGATION HEREUNDER FOR ANY REASON WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, DEFECTS IN, DESTRUCTION OF, DAMAGE TO OR INTERFERENCE WITH ANY
USE OF THE EQUIPMENT (FOR ANY REASON WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, WAR, ACT OF GOD, STRIKE OR GOVERNMENTAL REGULATION), THE
INVALIDITY, ILLEGALITY OR UNENFORCEABILITY (OR ANY ALLEGATION THEREOF) OF
THIS LEASE OR ANY PROVISION HEREOF, OR ANY OTHER OCCURRENCE WHATSOEVER,
WHETHER SIMILAR OR DISSIMILAR TO THE FOREGOING, WHETHER FORESEEN OR
UNFORESEEN.
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4. DEFINITIONS. Unless the context otherwise requires, as used in this
Lease, the following terms shall have the respective meanings indicated below
and shall be equally applicable to both the singular and the plural forms
thereof:
(a) "APPLICABLE LAW" shall mean all applicable Federal, state, local
and foreign laws (including, without limitation, any Environmental Law,
industrial hygiene and occupational safety or similar laws), ordinances,
judgments, decrees, injunctions, writs and orders of any Governmental
Authority and rules, regulations, orders, licenses and permits of any
Governmental Authority.
(b) "APPRAISAL PROCEDURE" shall mean the following procedure for
obtaining an appraisal of the Fair Market Sales Value or the Fair Market
Rental Value. Lessor shall provided Lessee with the names of three independent
Appraisers. Within ten (10) business days thereafter, Lessee shall select one
of such Appraisers to perform the appraisal. The selected Appraiser shall be
instructed to perform its appraisal based upon the assumptions specified in
the definition of Fair Market Sales Value or Fair Market Rental Value, as
applicable, and shall complete its appraisal within twenty (20) business days
after such selection. Any such appraisal shall be final, binding and
conclusive on Lessee and Lessor and shall have the legal effect of an
arbitration award. Lessee shall pay the fees and expenses of the selected
Appraiser.
(c) "APPRAISER" shall mean a person engaged in the business of
appraising property who has at least ten years' experience in appraising
property similar to the Equipment.
(d) "AUTHORIZED SIGNER" shall mean those officers of Lessee, set
forth on an incumbency certificate (in form and substance satisfactory to
Lessor) delivered by Lessee to Lessor, who are authorized and empowered to
execute this Lease, the Equipment Schedules and all other documents the
execution of which is contemplated hereby.
(e) "CERTIFICATE OF ACCEPTANCE" shall mean a certificate of
acceptance, in form and substance satisfactory to Lessor, executed and
delivered by Lessee in accordance with Section 7 hereof indicating, among
other things, that the Equipment described therein has been accepted by
Lessee for all purposes of this Lease.
(f) "DEFAULT" shall mean any event or condition which, with the
passage of time or the giving of notice, or both, would constitute an Event
of Default.
(g) "ENVIRONMENTAL LAW" shall mean any federal, state, or local
statute, law, ordinance, code, rule, regulation, or order or decree
regulating, relating to or imposing liability upon a person in connection
with the use, release or disposal of any hazardous, toxic or dangerous
substance, waste, or material as same may relate to the Equipment or its
operation.
(h) "EQUIPMENT" shall mean an item or items of personal property
designated from time to time by Lessee which are described on an Equipment
Schedule and which are being or will be leased by Lessee pursuant to this
Lease, together with all replacement parts, additions and accessories
incorporated therein or affixed thereto.
(i) "EQUIPMENT GROUP" shall consist of all Items of Equipment listed
on a particular Equipment Schedule.
(j) "EQUIPMENT LOCATION" shall mean the location of the Equipment,
as set forth on an Equipment Schedule or such other location (approved by
Lessor) as Lessee shall from time to time specify in writing.
(k) "EQUIPMENT SCHEDULE" shall mean each equipment lease schedule
from time to time executed by Lessor and Lessee with respect to an Equipment
Group, pursuant to an incorporating by reference all of the terms and
conditions of this Master Equipment Lease Agreement.
(l) "EVENT OF DEFAULT" shall have the meaning specified in Section 22
hereof.
(m) "FAIR MARKET RENTAL VALUE" or "FAIR MARKET SALE VALUE" shall mean
the value of each Item of Equipment for lease or sale, unless otherwise
specified herein as determined between Lessor and Lessee, or, if Lessor and
Lessee are unable to agree, pursuant to the Appraisal Procedure, which would
be obtained in an arms-length transaction between an informed and willing
lessor or seller (under no compulsion to lease or sell) and an informed and
willing lessee or buyer (under no compulsion to lease or purchase). In
determining the Fair Market Rental Value or Fair Market Sale Value of the
Equipment, (a) such Fair Market Rental Value or Fair Market Sale Value shall
be calculated on the assumption that the Equipment is in the condition and
repair required by Sections 12 and 13 hereof, and (b) there shall be excluded
from the calculation thereof the value of any upgrades and attachments made
pursuant to Section 14 hereof in which the Lessor does not own an interest;
PROVIDED, HOWEVER, that, unless otherwise provided in such Section 22, for
purposes of Section 22 of the Lease. Fair Market Sale Value of the Equipment
shall be determined based upon the actual facts and circumstances then
prevailing without regard to the assumptions in clause (a) above.
(n) "GOVERNMENTAL ACTION" shall mean all authorizations, consents,
approvals, waivers, filings and declarations of any Governmental Authority,
including, without limitation, those environmental and operating permits
required for the ownership, lease, use and operation of the Equipment.
(o) "GOVERNMENTAL AUTHORITY" shall mean any foreign, Federal, state,
county, municipal or other governmental authority, agency, board or court.
(p) "GUARANTOR" shall mean any guarantor of Lessee's obligations
hereunder.
(q) "ITEM OF EQUIPMENT" shall mean each item of the Equipment.
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(r) "LATE PAYMENT RATE" shall mean an annual interest rate equal
to the lesser of 16% or the maximum interest rate permitted by Applicable Law.
(s) "LEASE", "HEREOF", "HEREIN" and "HEREUNDER" shall mean, with
respect to an Equipment Group, this Master Equipment Lease Agreement and the
Equipment Schedule on which such Equipment Group is described, including all
addenda attached thereto and made a part thereof.
(t) "LIEN" shall mean all mortgages, pledges, security interests,
liens, encumbrances, claims or other charges of any kind whatsoever.
(u) "PURCHASE AGREEMENT" shall mean any purchase agreement or
other contract entered into between the Supplier and Lessee for the
acquisition of the Equipment to be leased hereunder.
(v) "RELATED EQUIPMENT SCHEDULE" shall have the meaning set forth
in Section 27 hereof.
(w) "RENEWAL NOTICE" shall have the meaning set forth in Section
32 hereof.
(x) "RETURN NOTICE" shall have the meaning set forth in Section
13 hereof.
(y) "RENT" shall mean the periodic rental payments due hereunder
for the leasing of the Equipment, as set forth on the Equipment Schedules,
and, where the context hereof requires, all such additional amounts as may
from time to time be payable under any provision of this Lease.
(z) "RENT COMMENCEMENT DATE" shall mean, with respect to an
Equipment Group, the date on which Lessor disburses funds for the purchase of
such Equipment Group, as determined by Lessor in its sole discretion.
(aa) "RENT PAYMENT DATE" with respect to an Equipment Group, shall
have the meaning set forth in the Equipment Schedule associated therewith.
(ab) "STIPULATED LOSS VALUE" shall mean, as of any Rent Payment
Date and with respect to an Item of Equipment, the amount determined by
multiplying the Total Cost for such Item of Equipment by the percentage
specified in the applicable Stipulated Loss Value Supplement opposite such
Rent Payment Date.
(ac) "STIPULATED LOSS VALUE SUPPLEMENT" with respect to an
Equipment Group, shall have the meaning set forth in the Equipment Schedule
associated therewith.
(ad) "SUPPLIER" shall mean the manufacturer or the vendor of the
Equipment, as set forth on each Equipment Schedule.
(ae) "TERM" shall mean the Initial Term, as defined in Section 8
hereof, and any Renewal Term, as defined in Section 8 hereof.
(af) "TOTAL COST" shall mean, with respect to an Item of
Equipment, (1) the acquisition cost of such Item of Equipment (including
Lessor's capitalized costs), as set forth on the Equipment Schedule on which
such Item of Equipment is described, or (2) if no such acquisition cost is
specified, the Supplier's invoice price for such Item of Equipment plus
Lessor's capitalized costs, or (3) if no such acquisition cost is specified
and no such invoice price is obtainable, an allocated price for such Item of
Equipment based on the Total Cost of all Items of Equipment set forth on the
Equipment Schedule on which such Item of Equipment is described, as
determined by Lessor in its sole discretion.
5. SUPPLIER NOT AN AGENT. LESSEE UNDERSTANDS AND AGREES THAT (i)
NEITHER THE SUPPLIER, NOR ANY SALES REPRESENTATIVE OR OTHER AGENT OF THE
SUPPLIER IS (1) AN AGENT OF LESSOR OR (2) AUTHORIZED TO MAKE OR ALTER ANY
TERM OR CONDITION OF THIS LEASE, AND (ii) NO SUCH WAIVER OR ALTERATION SHALL
VARY THE TERMS OF THIS LEASE UNLESS EXPRESSLY SET FORTH HEREIN.
6. ORDERING EQUIPMENT. Lessee has selected and ordered the Equipment
from the Supplier and, if appropriate, has entered into a Purchase Agreement
with respect thereto. Lessor shall accept an assignment from Lessee of
Lessee's rights, but none of Lessee's obligations, under any such Purchase
Agreement. Lessee shall arrange for delivery of the Equipment so that it can
be accepted in accordance with Section 7 hereof. If an Item of Equipment is
subject to an existing Purchase Agreement between Lessee and the Supplier,
Lessee warrants that such Item of Equipment has not been delivered to Lessee
as of the date of the Equipment Schedule applicable thereto. If Lessee causes
the Equipment to be modified or altered, or requests any additions thereto
prior to the Rent Commencement Date, Lessee (i) acknowledges that any such
modification, alteration or addition to an Item of Equipment may affect the
Total Cost, taxes, purchase and renewal options, if any, Stipulated Loss
Value and Rent with respect to such Item of Equipment, and (ii) hereby
authorizes Lessor to adjust such Total Cost, taxes, purchase and renewal
options, if any, Stipulated Loss Value and Rent as appropriate. Lessee hereby
authorizes Lessor to complete each Equipment Schedule with the serial numbers
and other identification data of the Equipment Group associated therewith, as
such data is received by Lessor.
7. DELIVERY AND ACCEPTANCE. Upon acceptance for lease by Lessee of
any Equipment delivered to Lessee and described in any Equipment Schedule,
Lessee shall execute and deliver to Lessor a Certificate of Acceptance.
LESSOR SHALL HAVE NO OBLIGATION TO ADVANCE FUNDS FOR THE PURCHASE OF THE
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EQUIPMENT UNLESS AND UNTIL LESSOR SHALL HAVE RECEIVED A CERTIFICATE OF
ACCEPTANCE RELATING THERETO EXECUTED BY LESSEE. Such Certificate of
Acceptance shall constitute Lessee's acknowledgment that such Equipment (a)
was received by Lessee, (b) is satisfactory to Lessee in all respects and is
acceptable to Lessee for lease hereunder, (c) is suitable for Lessee's
purposes, (d) is in good order, repair and condition, (e) has been installed
and operates properly, and (f) is subject to all of the terms and conditions
of this Lease (including, without limitation, Section 2 hereof).
8. TERM; SURVIVAL. With respect to any Item of Equipment, unless
otherwise specified thereon, the initial term of this Lease (the "Initial
Term") shall commence on the date on which such Item of Equipment is
delivered to Lessee, and, unless earlier terminated as provided herein, shall
expire on the final Rent Payment Date for such Item of Equipment. With
respect to an Item of Equipment, any renewal term of this Lease
(individually, a "Renewal Term"), as contemplated hereby, shall commence
immediately upon the expiration of the Initial Term or any prior Renewal
Term, as the case may be, and, unless earlier terminated as provided herein,
shall expire on the date on which the final payment of Rent is due and paid
hereunder. All obligations of Lessee hereunder shall survive the expiration,
cancellation or other termination of the Term hereof.
9. RENT. With respect to Each Item of Equipment, Lessee shall pay
the Rent set forth on the Equipment Schedule applicable to such Item of
Equipment, commencing on the Rent Commencement Date, and, unless otherwise set
forth on such Equipment Schedule, on the same day of each payment period
thereafter for the balance of the Term. Rent shall be due whether or not
Lessee has received any notice that such payments are due. All Rent shall be
paid to Lessor at its address set forth on the Equipment Schedule, or as
otherwise directed by Lessor in writing.
10. LOCATION; INSPECTION; LABELS. The Equipment shall be delivered to
the Equipment Location and shall not be removed therefrom without Lessor's
prior written consent. Lessor shall have the right to enter upon the
Equipment Location and inspect the Equipment at any reasonable time. Lessor
may, without notice to Lessee, remove the Equipment if the Equipment is, in
the opinion of Lessor, being used beyond its capacity or is in any manner
improperly cared for, abused or misused. At Lessor's request, Lessee shall
affix labels stating that the Equipment is owned by Lessor permanently in a
prominent place on the Equipment and shall keep such labels in good repair
and condition.
11. USE; ALTERATIONS. Lessee shall use the Equipment lawfully and
only in the manner for which it was designed and intended and so as to
subject it only to ordinary wear and tear. Lessee shall comply with all
Applicable Law. Lessee shall immediately notify Lessor in writing of any
existing, pending or threatened investigation, inquiry, claim or action by
any Governmental Authority in connection with any Applicable Law or
Governmental Action which could adversely affect the Equipment or this Lease.
Lessee, at its own expense, shall make such alterations, additions or
modifications or improvements to the Equipment as may be required from time
to time to meet the requirements of Applicable Law or Governmental Action.
Except as otherwise permitted herein, Lessee shall not make any alterations,
additions, modifications or improvements to the Equipment without Lessor's
prior written consent.
12. REPAIRS AND MAINTENANCE. Lessee, at Lessee's own cost and
expense, shall (a) keep the Equipment in good repair, good operating
condition and working order and in compliance with the manufacturer's
specifications, and (b) enter into and keep in full force and effect during
the Term hereof a maintenance agreement with the manufacturer of the
Equipment, or a manufacturer-approved maintenance organization, to maintain,
service and repair the Equipment so as to keep the Equipment in as good
operating condition and working order as it was when it first became subject
to this Lease and in compliance with the manufacturer's specifications. Upon
Lessor's request, Lessee shall furnish Lessor with an executed copy of any
such maintenance agreement. An alternate source of maintenance may be used by
Lessee with Lessor's prior written consent. Lessee, at its own cost and
expense and within a reasonable period of time, shall replace any part of any
Item of Equipment that becomes worn out, lost, stolen, destroyed, or otherwise
rendered permanently unfit or unavailable for use (whether or not such
replacement is covered by the aforesaid maintenance agreement), with a
replacement part of the same manufacture, value, remaining useful life and
utility as the replaced part immediately preceding the replacement (assuming
that such replaced part is in the condition required by this Lease). Such
replacement part shall be free and clear of all Liens. Notwithstanding the
foregoing, this paragraph shall not apply to any Loss or Damage (as defined
in Section 16 hereof) of any Item of Equipment.
13. RETURN OF EQUIPMENT. Upon the expiration (subject to Section 32
hereof and except as otherwise provided in an Equipment Schedule) or earlier
termination of this Lease, Lessee, at its sole expense, shall return the
Equipment to Lessor by delivering such Equipment F.A.S. or F.O.B. to such
location or such carrier (packed for shipping) as Lessor shall specify.
Lessee agrees that the Equipment, when returned, shall be in the condition
required
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by Section 12 hereof. All components of the Equipment shall have been
properly serviced, following the manufacturer's written operating and
servicing procedures, such that the Equipment is eligible for a
manufacturer's standard, full service maintenance contract without Lessor's
incurring any expense to repair or rehabilitate the Equipment. If, in the
opinion of Lessor, any Item of Equipment fails to meet the standards set
forth above, Lessee agrees to pay on demand all costs and expenses incurred
in connection with repairing such item of Equipment and restoring it so as to
meet such standards, assembling and delivering such Item of Equipment. Lessee
shall give Lessor ninety (90) days written notice (the "Return Notice") that
Lessee is returning the Equipment as provided for above. If Lessee fails to
return any Item of Equipment as required hereunder, then, all of Lessee's
obligations under this Lease (including, without limitation, Lessee's
obligation to pay Rent for such Item of Equipment at the rental then
applicable under this Lease) shall continue in full force and effect until
such Item of Equipment shall have been returned in the condition required
hereunder.
14. EQUIPMENT UPGRADE/ATTACHMENTS. In addition to the requirements of
Section 11 hereof, Lessee, at its own expense, may from time to time add or
install upgrades or attachments to the Equipment during the Term, PROVIDED,
that such upgrades or attachments (a) are readily removable without causing
material damage to the Equipment, (b) do not materially adversely effect the
Fair Market Sale Value, the Fair Market Rental Value, residual value,
productive capacity, utility or remaining useful life of the Equipment, and
(c) do not cause such Equipment to become "limited use property" within the
meaning of Revenue Procedure 76-30, 1976-2 C.B. 647 (or such other successor
tax provision), as of the applicable delivery date or the time of such
upgrade or attachment. Any such upgrades or attachments which are not
required by Section 11 hereof and which can be removed without causing
damage to or adversely affecting the condition of the Equipment, or reducing
the Fair Market Sale Value, the Fair Market Rental Value, residual value,
productive capacity, utility or remaining useful life of the Equipment shall
remain the property of Lessee; and upon the expiration or earlier termination
of this Lease and provided that no Event of Default exists, Less may, at its
option, remove any such upgrades or attachments and, upon such removal, shall
restore the Equipment to the condition required hereunder.
15. SUBLEASE AND ASSIGNMENT. (A) WITHOUT LESSOR'S PRIOR WRITTEN CONSENT,
LESSEE SHALL NOT (1) ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE
DISPOSE OF THIS LEASE, THE EQUIPMENT OR ANY INTEREST THEREIN, OR (II) SUBLET
OR LEND THE EQUIPMENT TO, OR PERMIT THE EQUIPMENT TO BE USED BY, ANYONE OTHER
THAN LESSEE OR LESSEE'S QUALIFIED EMPLOYEES.
(b) Lessor, at any time with or without notice to Lessee, may sell,
transfer, assign and/or grant a security interest in this Lease, any
Equipment Schedule or any item of Equipment. In any such event, any such
purchaser, transferee, assignee or secured party shall have and may exercise
all of Lessor's rights hereunder with respect to the items to which any such
sale, transfer, assignment and/or security interest relates, and LESSEE SHALL
NOT ASSERT AGAINST ANY SUCH PURCHASER, TRANSFEREE, ASSIGNEE OR SECURED PARTY
ANY DEFENSE, COUNTERCLAIM OR ASSET THAT LESSEE MAY HAVE AGAINST LESSOR.
Lessee acknowledges that no such sale, transfer, assignment and/or security
interest will materially change Lessee's duties hereunder or materially
increase its burdens or risk hereunder. Lessee agrees that upon written
notice to Lessee of any such sale, transfer, assignment and/or security
interest, Less shall acknowledge receipt thereof in writing and shall comply
with the directions and demands of Lessor's successor or assign.
16. LOSS OF OR DAMAGE TO EQUIPMENT. (a) Lessee shall bear the entire risk
of loss, theft, destruction, disappearance of or damage to any and all items
of Equipment ("Loss of Damage") from any cause whatsoever during the Term
hereof until the Equipment is returned to Lessor in accordance with Section
13 hereof. No loss or Damage shall relieve Lessee of the obligation to pay
Rent or of any other obligation under this Lease.
(b) In the event of Loss or Damage to any item of Equipment, Lessee, at
the option of Lessor, shall within thirty (30) days following such Loss or
Damage: (1) place such Item of Equipment in good condition and repair, in
accordance with the terms hereof: (2) replace such item of Equipment with
replacement equipment (acceptable to Lessor) in as good condition and repair,
and with the same value, remaining useful economic life and utility, as such
replaced Item of Equipment immediately preceding the Loss or Damage (assuming
that such replaced Item of Equipment is the condition required by this
Lease), which replacement equipment shall be free and clear of all Liens, or
(3) pay to Lessor the sum of (i) all Rent due and owing hereunder with
respect to such Item of Equipment (at the time of such payment) plus (ii) the
Stipulated Loss Value as of the Rent Payment Date next following the date of
such Loss or Damage with respect to such Item of Equipment, as set forth on
the Schedule applicable thereto. Upon Lessor's receipt of the payment
required under subsection (3) above, Lessee shall be entitled to Lessor's
interest in such Item of Equipment, in its then condition and location, "as
is" and "where is", without any warranties, express or implied. If Lessee
replaces the Item of Equipment pursuant to subsection (b) above, title to
such replacement equipment shall immediately (and without further act) vest
in Lessor and thereupon shall be deemed to constitute Items of Equipment and
be fully subject to this Lease as if originally leased hereunder. If Lessee
fails to either restore or replace the Item of
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Equipment pursuant to subsection (1) or (2) above, respectively, Lessee shall
make the payment under subsection (3) above.
17. INSURANCE. (a) Lessee, at all times during the Term hereof (until the
Equipment shall have been returned to Lessor) and at Lessee's own cost and
expense, shall maintain (1) insurance against all risk of physical loss or
damage to the Equipment (including theft and collision for Equipment
consisting of motor vehicles) in an amount not less than the full replacement
value thereof or the Stipulated Loss Value thereof, which is greater, and (2)
comprehensive public liability insurance including blanket contractual
liability for personal and bodily injury and property damage in an amount
satisfactory to Lessor.
(b) All insurance policies required hereunder shall (1) require 30 days'
prior written notice of cancellation or material change in coverage to Lessor
(any such cancellation or change, as applicable, not being effective until
the thirtieth (30th) day after the giving of such notice); (2) name Lessor as
an additional insured under the public liability policies and name Lessor as
sole loss payee under the property insurance policies; (3) not require
contributions from other policies held by Lessor; (4) waive any right of
subrogation against Lessor; (5) in respect of any liability of any of Lessor,
except for the insurers' salvage rights in the event of a Loss or Damage,
waive the right of such insurers to set-off, to counterclaim or to any other
deduction, whether by attachment or otherwise, to the extent of any monies
due Lessor under such policies; (6) not require that Lessor pay or be liable
for any premiums with respect to such insurance covered thereby; (7) be in
full force and effect throughout any geographical areas at any time traversed
by any Item of Equipment; and (8) contain breach of warranty provisions
providing that, in respect of the interests of Lessor in such policies, the
insurance shall not be invalidated by any action or inaction of Lessee or any
other person (other than Lessor) and shall insure Lessor regardless of any
breach or violation of any warranty, declaration or condition contained in
such policies by Lessee or by any other person (other than Lessor). Prior to
the first date of delivery of any Item of Equipment hereunder, and thereafter
not less than 15 days prior to the expiration dates of the expiring policies
theretofore delivered pursuant to this Section, Lessee shall deliver to
Lessor a duplicate original of all policies (or in the case of blanket
policies, certificates thereof issued by the insurers thereunder) for the
insurance maintained pursuant to this Section.
18. GENERAL TAX INDEMNIFICATION. Lessee shall pay when due and shall
indemnify and hold Lessor harmless from and against (on an after-tax basis)
any and all taxes, fees, withholdings, levies, imposts, duties, assessments
and charges of any kind and nature (together with interest and penalties
thereof)(including, without limitation, sales, use, gross receipts, personal
property, ad valorem, business and occupational, franchise, value added,
leasing, leasing use, documentary, stamp or other taxes) imposed upon or
against Lessor, Lessor's assigns, Lessee or any Item of Equipment by any
Governmental Authority with respect to any Item of Equipment or the
manufacturing, ordering, sale, purchase, shipment, delivery, acceptance or
rejection, ownership, titling, registration, leasing, subleasing, possession,
use, operation, removal, return or other dispossession thereof or upon the
rents, receipts or earnings arising therefrom or upon or with respect to this
Lease, excepting only all Federal, state and local taxes on or measured by
lessor's net income (other than income tax, resulting from making any
alterations, improvements, modifications, additions, upgrades, attachments,
replacements or substitutions by Lessee). Whenever this Lease terminates as
to any Item of Equipment, Less shall, upon written request by Lessor, advance
to Lessor the amount determined by Lessor to be the personal property or
other taxes on said item which are not yet payable, but for which Lessee is
responsible, provided Lessor provides Lessee with copies of tax bills
supporting Lessor's request.
19. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to perform or
comply with any of its obligations contained herein, Lessor may (but shall
not be obligated to do so) itself perform or comply with such obligations,
and the amount of the reasonable costs and expenses of Lessor incurred in
connection with such performance or compliance, together with interest on
such amount at the late Payment Rate, shall be payable by Lessee to Lessor
upon demand. No such performance or compliance by Lessor shall be deemed a
waiver of the rights and remedies of Lessor or any assignee of Lessor against
Lessee hereunder or be deemed to cure the default of Lessee hereunder.
20. DELINQUENT PAYMENTS: INTEREST. If Lessee fails to pay any Rent or
other sums under this Lease when the same becomes due, Lessee shall pay to
Lessor a late charge equal to five percent (5%) of such delinquent amount.
Such late charge shall be payable by Lessee upon demand by Lessor and shall
be deemed Rent hereunder. In no event shall such late charge exceed the
maximum amounts permitted under Applicable Law.
21. PERSONAL PROPERTY: LIENS. Lessor and Lessee hereby agree that the
Equipment is, and shall at all times remain, personal property
notwithstanding the fact that any Item of Equipment may now be, or hereafter
become, in any manner affixed or attached to real property or any
improvements thereon. Lessee shall at all times keep the Equipment free and
clear from all Liens. Lessees shall (i) give Lessor immediate written notice
of any such Lien, (ii) promptly, at Lessee's sole cost and expense, take such
action as may be necessary to discharge any such Lien, and
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(iii) indemnify and hold Lessor, on an after-tax basis, harmless from and
against any loss or damage caused by any such Lien.
22. EVENTS OF DEFAULT: REMEDIES. (a) As used herein, the term "Event
of Default" shall mean any of the following events: (1) Lessee fails to pay
any Rent within ten (10) days after the same shall have become due; (2)
Lessee or any Guarantor becomes insolvent or makes an assignment for the
benefit of its creditors; (3) a receiver, trustee, conservator or liquidator
of Lessee or any Guarantor or of all or a substantial part of Lessee's or
such Guarantor's assets is appointed with or without the application or
consent of Lessee or such Guarantor, respectively; (4) a petition is filed by
or against Lessee or any Guarantor under any bankruptcy, insolvency or
similar legislation; (5) Lessee or any Guarantor violates or fails to perform
any provision of either this Lease or any other loan, lease or credit
agreement or any acquisition or purchase agreement with Lessor or any other
party; (6) Lessee violates or fails to perform any covenant or representation
made by Lessee herein; (7) any representation or warranty made herein or in
any Lease, certificate, financial statement or other statement furnished to
Lessor shall prove to be false or misleading in any material respect as of
the date on which the same was made; (8) Lessee makes a bulk transfer of
furniture, furnishings, fixtures or other equipment or inventory; or (9)
there is a material adverse change in Lessee's or any Guarantor's financial
condition since the first Rent Commencement Date of any Equipment Schedule
executed in connection herewith. An Event of Default with respect to any
Equipment Schedule hereunder shall, at Lessor's option, constitute an Event
of Default for all Equipment Schedules hereunder and any other agreements
between Lessor and Lessee.
(b) Upon the occurrence of an Event of Default, Lessor may do one
or more of the following as Lessor in its sole discretion shall elect: (1)
proceed by appropriate court action or actions, either at law or in equity,
to enforce performance by Lessee of the applicable covenants of this Lease or
to recover damages for the breach thereof; (2) sell any Item of Equipment at
public or private sale; (3) hold, keep idle or lease to others any Item of
Equipment as Lessor in its sole discretion may determine; (4) by notice in
writing to Lessee, terminate this Lease, without prejudice to any other
remedies hereunder; (5) demand that Lessee, and Lessee shall, upon written
demand of Lessor and at Lessee's expense forthwith return all Items of
Equipment to Lessor or its order in the manner and condition required by, and
otherwise in accordance with all of the provisions of this Lease, except
those provisions relating to periods of notice; (6) enter upon the premises
of Lessee or other premises where any Item of Equipment may be located and,
without notice to Lessee and with or without legal process, take possession
of and remove all or any such Items of Equipment without liability to Lessor
by reason of such entry or taking possession, and without such action
constituting a termination of this Lease unless Lessor notifies Lessee in
writing to such effect; (7) by written notice to Lessee specifying a payment
date, demand that Lessee pay to Lessor, and Lessee shall pay to Lessor, on
the payment date specified in such notice, as liquidated damages for loss of
a bargain and not as a penalty, any unpaid Rent due prior to the payment date
specified in such notice plus whichever of the following amounts Lessor, in
its sole discretion, shall specify in such notice (together with interest on
such amount at the Late Payment Rate from the payment date specified in such
notice to the date of actual payment): (i) an amount, with respect to an Item
of Equipment, equal to the Rent payable for such Item of Equipment for the
remainder of the then current Term thereof, after discounting such Rent to
present worth as of the payment date specified in such notice on the basis of
a per annum rate of discount equal to five percent (5%) from the respective
dates upon which such Rent would have been paid had this Lease not been
terminated; or (ii) the Stipulated Loss Value, computed as of the payment
date specified in such notice or, if such payment date is not a Rent Payment
Date, the Rent Payment Date next following the payment date specified in such
notice (provided, however, that, with respect to any Item of Equipment
returned to or repossessed by Lessor, the amount recoverable under this
clause (ii) shall be reduced (but not below zero) by an amount equal to the
Fair Market Sales Value (taking into account its actual condition) of such
Item of Equipment; (8) cause Lessee, at its expense, to promptly assemble any
and all Items of Equipment and return the same to Lessor at such place as
Lessor may designate in writing; and (9) exercise any other right or remedy
available to Lessor under applicable law or proceed by appropriate court
action to enforce the terms hereof or to recover damages for the breach
hereof or to rescind this Lease. In addition, Lessee shall be liable, except
as otherwise provided above, for any and all unpaid Rent due hereunder before
or during the exercise of any of the foregoing remedies, and for legal fees
and other costs and expenses incurred by reason of the occurrence of any
Event of Default or the exercise of Lessor's remedies with respect thereto,
including without limitation the repayment in full of any costs and expenses
necessary to be expended in repairing any Item of Equipment in order to cause
it to be in compliance with all maintenance and regulatory standards imposed
by this Lease. If an Event of Default occurs, to the fullest extent permitted
by law, Lessee hereby waives any right to notice of sale and further waives
any defenses, rights, offsets or claims against Lessor because of the manner
or method of sale of disposition of any Items of Equipment. None of Lessor's
rights or remedies hereunder are intended to be exclusive of, but each shall
be cumulative and in addition to any other right or remedy referred to
hereunder or otherwise available to Lessor or its assigns at law or in
equity. No express or implied waiver by Lessor of any Event of Default shall
constitute a waiver of any other Event of Default or a waiver of any of
Lessor's rights.
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23. NOTICES. All notices and other communications hereunder shall be
in writing and shall be transmitted by hand, overnight courier or certified
mail (return receipt requested), postage prepaid. Such notices and other
communications shall be addressed to the respective party at the address set
forth above or at such other address as any party may from time to time
designate by notice duly given in accordance with this Section. Such notices
and other communications shall be effective upon receipt.
24. GENERAL INDEMNIFICATION. Lessee shall pay, and shall indemnify
and hold Lessor harmless on an after-tax basis from and against, any and all
liabilities, causes of action, claims, suits, penalties, damages, losses,
costs or expenses (including attorneys' fees), obligations, liabilities,
demands and judgments, and Liens, of any nature whatsoever (collectively, a
"Liability") arising out of or in any way related to: (a) this Lease or any
other written agreement entered into in connection with the transactions
contemplated hereby and thereby (including, without limitation, a Purchase
Agreement, if any) or any amendment, waiver or modification of any of the
foregoing or the enforcement of any of the terms hereof or any of the
foregoing, (b) the manufacture, purchase, ownership, selection, acceptance,
rejection, possession, lease, sublease, operation, use, maintenance,
documenting, inspection, control, loss, damage, destruction, removal,
storage, surrender, sale, use, condition, delivery, nondelivery, return or
other disposition of or any other matter relating to any Item of Equipment or
any part or portion thereof (including, in each case and without limitation,
latent or other defects, whether or not discoverable, any claim for patent,
trademark or copyright infringement and any and all Liabilities in any way
relating to or arising out of injury to persons, properties or the
environment or any and all Liabilities based on strict liability in tort,
negligence, breach of warranties or violations of any regulatory law or
requirement, (c) a failure to comply fully with any Environmental Law with
respect to the Equipment or its operation or use, and (d) Lessee's failure to
perform any covenant, or breach of any representation or warranty, hereunder;
PROVIDED, that the foregoing indemnity shall not extend to the Liabilities to
the extent resulting solely from the gross negligence or willful misconduct
or Lessor. Lessee shall deliver promptly to Lessor (i) copies of any
documents received from the United States Environmental Protection Agency or
any state, county or municipal environmental or health agency and (ii) copies
of any documents submitted by Lessee or any of its subsidiaries to the United
States Environmental Protection Agency or any state, county of municipal
environmental or health agency concerning the Equipment or its operation.
25. SEVERABILITY; CAPTIONS. Any provision of this Lease or any
Equipment Schedule which is prohibited or unenforceable in any jurisdiction
shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability shall not invalidate or
render unenforceable such provision in any other jurisdiction. Captions are
intended for convenience or reference only, and shall not be construed to
define, limit or describe the scope of intent of any provisions hereof.
26. LESSOR'S EXPENSE. Lessee shall pay all costs and expenses of
Lessor, including attorneys' fees and the fees of any collection agencies,
incurred by Lessor in enforcing any of the terms, conditions or provisions
hereof or in protecting Lessor's rights hereunder.
27. RELATED EQUIPMENT SCHEDULES. In the event that any Item of
Equipment covered under any Equipment Schedule hereunder may become attached
or affixed to, or used in connection with, Equipment covered under another
Equipment Schedule hereunder (a "Related Equipment Schedule"), Lessee agrees
that, if Lessee elects to exercise a purchase or renewal option under any
such Equipment Schedule, or if Lessee elects to return the Equipment under
any such Equipment Schedule pursuant to Section 13 hereof, then Lessor, in
its sole discretion, may require that all Equipment under all Related
Equipment Schedules be similarly disposed of.
28. FINANCIAL AND OTHER DATA. During the Term hereof, Lessee shall
furnish Lessor, as soon as available and in any event within 60 days after
the end of each quarterly period (except the last) of each fiscal year, and,
as soon as available and in any event within 120 days after the last day of
each fiscal year, financial statements of Lessee and each Guarantor, in each
case certified by an independent public accountant if customarily available
or requested. Lessee shall also furnish such other financial reports,
information or data as Lessor may reasonably request from time to time.
29. COMMITMENT FEE REQUIREMENT. An amount equal to the first periodic
payment of Rent must accompany each Lessee proposal for an Equipment Schedule
hereunder. THIS COMMITMENT FEE IS NON-REFUNDABLE; provided, however, that,
upon Lessor's acceptance of Lessee's proposal to enter into such Equipment
Schedule, such commitment fee shall be applied to the first periodic payment
of Rent thereunder.
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30. NO AFFILIATION WITH THE SUPPLIER. Lessee hereby represents and
warrants to Lessor that, except as previously disclosed in writing to Lessor,
neither Lessee nor any of its officers or directors (if a corporation) or
partners (if a partnership) has, directly or indirectly, any financial
interest in the Supplier.
31. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee represents and
warrants that: (a) Lessee is a corporation duly organized and validly
existing in good standing under the laws of the state of its incorporation;
(b) the execution, delivery and performance of this Lease and all related
instruments and documents: (1) have been duly authorized by all necessary
corporate action on the part of Lessee, (2) do not require the approval of
any stockholder, partner, trustee, or holder of any obligations of Lessee
except such as have been duly obtained, and (3) do not and will not
contravene any law, governmental rule, regulation or order now binding
on Lessee, or the charter or by-laws of Lessee, or contravene the provisions
of, or constitute a default under, or result in the creation of any lien or
encumbrance upon the property of Lessee under, any indenture, mortgage,
contract or other agreement to which Lessee is a party or by which it or its
property is bound; (c) this Lease and all related instruments and documents,
when entered into, will constitute legal, valid and binding obligations of
Lessee enforceable against Lessee in accordance with the terms thereof; (d)
there are no pending actions or proceedings to which Lessee is a party, and
there are no other pending or threatened actions or proceedings of which
Lessee has knowledge, before any court, arbitrator or administrative agency,
which, either individually or in the aggregate, would adversely affect the
financial condition of Lessee, or the ability of Lessee to perform its
obligations hereunder, (e) Lessee is not in default under any obligation for
the payment of borrowed money, for the deferred purchase price of property or
for the payment of any rent under any lease agreement which, either
individually or in the aggregate, would have the same such effect; (f) under
the laws of the state(s) in which Equipment is to be located, the Equipment
consists solely of personal property and not fixtures; (g) the financial
statements of Lessee (copies of which have been furnished to Lessor) have
been prepared in accordance with generally acceptable accounting principles
consistently applied ("GAAP"), and fairly present Lessee's financial
condition and the results of its operations as of the date of and for the
period covered by such statements, and since the date of such statements
there has been no material adverse change in such conditions or operations; (h)
the address stated above is the chief place of business and chief executive
offices, or in the case of individuals, the primary residence, of Lessee; (i)
Lessee does not conduct business under a trade, assumed or fictitious name;
and (j) the Equipment is being leased hereunder solely for business purposes
and that no item of Equipment will be used for personal, family or household
purposes.
32. RENEWAL AND PURCHASE OPTIONS. With respect to an Equipment Schedule
and the Equipment Group set forth thereon, so long as no Default or Event of
Default shall have occurred and is continuing, then, upon not less than
ninety (90) days prior written notice to Lessor, (the "Renewal Notice")
Lessee may (a) at the expiration of the Initial Term, or any Renewal Term,
purchase all, but not less than all, of the Equipment Group for the Fair
Market Sale Value of such Equipment Group, payable in cash to Lessor upon the
expiration of the Initial Term of any Renewal Term, as the case may be, (b)
at the expiration of the Initial Term, renew this Lease on a month to month
basis at the same Rent payable at the expiration of the Initial Term, or (c)
at the expiration of the Initial Term, renew this Lessee for a minimum period
of not less than twelve (12) consecutive months at the then current Fair
Market Rental Value. If Lessee fails to give Lessor the Return Notice or the
Renewal Notice at least ninety (90) days before the expiration of the Initial
Term, Lessee shall be deemed to have chosen option (b) above. If Lessee
exercises option (a) above, Lessee shall purchase the Equipment "as is" and
"where is" and without any warranties, express or implied, by Lessor.
33. LESSEE'S WAIVERS. To the extent permitted by Applicable Law, Lessee
hereby waives (a) any and all rights and remedies which it may now have or
which at any time hereafter may be conferred upon it by statute (including,
without limitation, Article 2A of the Uniform Commercial Code, as applicable)
or otherwise, (1) which may limit or modify Lessor's rights or remedies
hereunder; (2) to terminate, cancel, quit, repudiate or surrender this Lease,
except as expressly provided herein; (3) to reject, revoke acceptance or
accept partial delivery of the Equipment; (4) to recover damages from Lessor
for any breach of warranty or for any other reason PROVIDED, HOWEVER, that no
such waiver shall preclude Lessee from asserting any such claim against
Lessor in a separate cause of action; or (5) to setoff or deduct all or any
part of any claimed damages resulting from Lessor's default, if any, under
this Lease.
34. UCC FILINGS. LESSEE HEREBY APPOINTS LESSOR OR ITS ASSIGNEE AS ITS
TRUE AND LAWFUL ATTORNEY IN FACT, IRREVOCABLY AND COUPLED WITH AN INTEREST,
TO EXECUTE AND FILE ON BEHALF OF LESSEE ALL UCC FINANCING STATEMENTS WHICH IN
LESSOR'S SOLE DISCRETION ARE NECESSARY OR PROPER TO SECURE LESSOR'S INTEREST
IN THE EQUIPMENT IN ALL APPLICABLE JURISDICTIONS.
35. MISCELLANEOUS. TIME IS OF THE ESSENCE WITH RESPECT TO THIS LEASE. ANY
FAILURE OF LESSOR TO REQUIRE STRICT PERFORMANCE BY LESSEE OR ANY WAIVER BY
LESSOR OF ANY PROVISION HEREIN SHALL NOT BE CONSTRUED AS A
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CONSENT OR WAIVER OF ANY PROVISION OF THIS LEASE. Neither this Lease nor any
Equipment Schedule may be amended except by a writing signed by Lessor and
Lessee. This Lease and each Equipment Schedule shall be binding upon, and
inure to the benefit of, the parties hereto, their permitted successors and
assigns. This Lease will be binding upon Lessor only if executed by a duly
authorized officer or representative of Lessor at Lessor's principal place of
business as set forth above. This Lease, and all other documents (the
execution and delivery of which by Lessee is contemplated hereunder), shall
be executed on Lessee's behalf by Authorized Signers of Lessee. THIS LEASE IS
BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING
ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
36. JURY TRIAL WAIVER. LESSOR AND LESSEE HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION OR PROCEEDING TO WHICH LESSOR OR LESSEE MAY BE PARTIES ARISING OUT OF
OR IN ANY WAY PERTAINING TO THIS LEASE. THIS WAIVER IS MADE KNOWINGLY,
WILLINGLY AND VOLUNTARILY BY THE LESSOR AND THE LESSEE WHO EACH ACKNOWLEDGE
THAT NO REPRESENTATIONS HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS
WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT.
37. MORE THAN ONE LESSEE. If more than one person or entity executes this
Lease, each Equipment Schedule, and all addenda or other documents executed in
connection herewith or therewith, as "Lessee", the obligations of "Leases"
contained herein and therein shall be deemed joint and several and all
references to "Lessee" shall apply both individually and jointly.
38. QUIET ENJOYMENT. So long as no Event of Default has occurred and is
continuing, Lessee shall peaceably hold and quietly enjoy the Equipment
without interruption by Lessor or any person or entity claiming through
Lessor.
39. ENTIRE AGREEMENT. This Lease, together with all Equipment Schedules,
riders and addenda executed by Lessor and Lessee collectively constitute the
entire understanding or agreement between Lessor and Lessee with respect to
the leasing of the Equipment, and there is no understanding or agreement,
oral or written, which is not set forth herein or therein. By initialing
below, Lessee hereby further acknowledges the conditions of this Section 30.
Lessee's Initials TF
------
40. EXECUTION IN COUNTERPARTS. This Master Equipment Lease Agreement may
be executed in several counterparts, each of which shall be an original and
all of which shall constitute but one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day
and year first above written.
LESSEE:
GEOGRAPHICS, INC.
By: /s/ Terry Fife
------------------------
Name: Terry Fife
Title: Vice President Finance and Secretary
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Donald C. Davis
-----------------------
Name: Donald C. Davis
Title: Vice President
Regional Business Unit Manager
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<PAGE>
CERTIFICATE OF SECRETARY
OF
GEOGRAPHICS, INC
I, Terry Fife the duly elected and qualified Secretary of GEOGRAPHICS,
----------
INC., (the "Corporation"), do hereby certify:
a. That attached hereto as EXHIBIT A are complete and correct
copies of resolutions adopted by the Board of Directors of the Corporation,
authorizing the actions referred to therein; sad resolutions constitute all
of the resolutions adopted by such Board of Directors relating to such
matters; such resolutions have not been in any way modified, amended,
annulled, rescinded or revoked and are in full force and effect as of the date
hereof; and
b. The persons listed in EXHIBIT B attached hereto are duly
qualified and acting officers of the Corporation, holding on the date hereof
the offices set forth opposite their names and the signatures appearing
opposite their names are the genuine signatures of such officers.
IN WITNESS WHEREOF, I have hereunto signed my name this 24 day of
--
May 1996.
- --- --
/s/ Terry Fife
-------------------
Secretary
<PAGE>
EXHIBIT A
RESOLUTION OF THE BOARD OF DIRECTORS OF
GEOGRAPHICS, INC.
DATED MAY 24, 1996
WHEREAS, the Board of Directors of GEOGRAPHICS, INC. (the "Corporation")
desire that the Corporation enter into an equipment leasing transaction with
KeyCorp Leasing Ltd., as lessor, for the purpose of leasing the equipment
(the "Equipment") described in a Master Equipment Lease Agreement and various
equipment schedules from time to time entered into with respect thereto
(collectively, the "Lease");
NOW, THEREFORE, BE IT RESOLVED, that (i) the execution and delivery of
the Lease by the Corporation and the financing of the acquisition of the
Equipment are hereby authorized, approved, ratified and confirmed in all
respects, and (ii) the Corporation hereby is, and the Authorized Officers (as
defined below) hereby are, authorized and empowered to negotiate and enter
into the Lease and such other documents as may be necessary, advisable, or
proper in connection with the above transaction, and be it
FURTHER RESOLVED, that Terry Fife of the Corporation, and
---------- -------------
of the Corporation (herein the "Authorized Officers") be, and hereby are,
authorized to execute and deliver the Lease and any and all certificates,
documents, instruments or other papers as may be necessary or desirable in
order to consummate the transactions therein contemplated, and that all
actions heretofore taken or taken hereinafter by the Authorized Officers in
furtherance of the actions herein authorized are ratified, confirmed, adopted
and approved in all respects.
<PAGE>
EXHIBIT B
INCUMBENCY CERTIFICATE
Name: Office: Signature:
RONALD S. DEANS CHAIRMAN, PRESIDENT & CEO /s/ RONALD S. DEANS
- -------------------------- ------------------------------ --------------------
MARK G. DEANS DIRECTOR, EXECUTIVE VP /s/ MARK G. DEANS
- -------------------------- ------------------------------ --------------------
R. SCOTT DEANS DIRECTOR, EXECUTIVE VP /s/ R. SCOTT DEANS
- -------------------------- ------------------------------ --------------------
- -------------------------- ------------------------------ --------------------
- -------------------------- ------------------------------ --------------------
- -------------------------- ------------------------------ --------------------
- -------------------------- ------------------------------ --------------------
- -------------------------- ------------------------------ --------------------
<PAGE>
[LOGO] KEYCORP LEASING LTD.
AMENDMENT TO MASTER EQUIPMENT LEASE AGREEMENT
THIS AMENDMENT dated as of May 22, 1996 amends that certain Master
Equipment Lease Agreement dates as of May 22, 1996 between KEYCORP LEASING
LTD., as Lessor, and GEOGRAPHICS, INC., as Lessee (the "Master Lease"),
Unless otherwise specified herein, all capitalized terms shall have the
meanings ascribed to them in the Master Lease.
Lessor and Lessee hereby agree that the Master Lease will be amended,
with respect to each Equipment Schedule executed in connection therewith, to
add the following section:
LESSEE'S FINANCIAL COVENANTS, Lessee hereby covenants with Lessor as follows:
I. LEVERAGE RATIO: its Leverage Ratio shall not exceed 2.0 to 1.00, as
measured on an annual basis.
II. WORKING CAPITAL: its Working Capital shall not be less than $2,000,000,
as measured on an annual basis.
III. FREE CASH FLOW RATIO: its Free Cash Flow Ratio shall not be less than 1.25
to 1.00, as measured on an annual basis.
IV. DEFINITIONS:
A. "LEVERAGE RATIO" shall mean the ratio of Total Liabilities to
Tangible Net Worth.
B. "TOTAL LIABILITIES" shall mean all debt and other obligations,
INCLUDING, without limitation, Current Liabilities and long term
debt (INCLUDING, without limitation, term loans, bond issuances,
debentures or notes, capital leases and deferred credit).
C. "TANGIBLE NET WORTH" shall mean (1) the gross book value of
all assets, excluding goodwill, patents, trademarks, licenses, trade
names, organizational expenses, treasury stock, unamortized debt
discount and expense, deferred research and developmental costs, and
other like intangibles, LESS (2) Total Liabilities.
D. "WORKING CAPITAL" shall mean Current Assets LESS Current Liabilities.
E. "CURRENT ASSETS" shall mean the gross book value of all
assets that are expected to be realized in cash or sold or consumed
during a normal operating cycle or within one year, INCLUDING, without
limitation, cash, cash equivalents, accounts and notes receivable, and
inventories, but EXCLUDING prepaid expenses.
F. "CURRENT LIABILITIES" shall mean all debt and other obligations
that are to be paid by use of Current Assets during a normal operating
cycle or within one year, INCLUDING, without limitation, deposits
received, advance payments, trade acceptances, accrued expenses, notes
payable, short-term bank loans, current maturities of long term debt
and capital leases, accrued and deferred income taxes, and any reserves
against assets.
G. "FREE CASH FLOW" shall mean the ratio of (1) the sum of net
income, depreciation, amortization, other non-cash expenses, and common
stock issues, EXCLUDING any non-financed capital expenditures, any
dividends or distributions to shareholders, and long term investments
to (2) the SUM of current maturities of long term debt and capital
lease obligations.
<PAGE>
Except as modified hereby, all of the terms, covenants and conditions of
the Master Lease shall remain in full force and effect and are in all respects
hereby ratified and affirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment as of
the date first above written.
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Steven R. DeCarlo
------------------------
Name: Steven R. DeCarlo
Title: Vice President
LESSEE:
GEOGRAPHICS, INC.
By: /s/ Michael Bayless
------------------------
Name: Michael Bayless
Title: Corporate Controller
<PAGE>
EXHIBIT 10.5
SUBORDINATION AGREEMENT
(Blanket Lien)
THIS SUBORDINATION AGREEMENT is made as of May 22, 1996 by U.S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION C/O U.S. BANCORP MORTGATE COMPANY (the
"Company"), for the benefit of KEYCORP LEASING LTD., a Delaware corporation
with its principal place of business at 54 State Street, Albany, NY 12207
("KCL").
I N T R O D U C T I O N :
The Company has a security interest (the "Company Security Interest") in
certain property of GEOGRAPHICS, INC. (the "Obligor"). KCL and the Obligor
are about to enter into an equipment financing transaction (the "Financing")
to be evidenced by a lease agreement, promissory note or other evidence of
indebtedness in connection with the property described on Exhibit A attached
hereto (the "Equipment"). In order to induce KCL to enter into the Financing
with the Obligor, the Company desires to subordinate the Company Security
Interest to the interest of KCL in the Financing and the Equipment
(collectively, the "KCL Interest").
NOW, THEREFORE, in consideration of the above premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company, for itself and for its successors and
assigns, hereby agrees that:
1. The Company Security Interest, and any other security interest of
the Company in the Equipment and in any proceeds arising out of the sale,
lease or other disposition of the Equipment, shall be subordinate and junior
to the KCL Interest and any security or other interest which KCL, its
successors and assigns, may have in the Equipment and any proceeds arising out
of any sale, lease or other disposition thereof. This subordination shall
apply irrespective of the time or order of attachment or perfection of the
Company Security Interest and the KCL Interest and shall remain in full force
and effect regardless of whether the Company or KCL may seek to rescind, amend,
terminate, or reform, by litigation or otherwise, its respective agreements
with the Obligor.
2. The Company hereby agrees, for itself and its successors and
assigns, that KCL may assign its rights hereunder to any person or entity
("Assignee") and that the Company Security Interest shall be subordinate and
junior to the interest of any such Assignee. The Company shall not assign or
transfer to others any claim the Company has or may have against the Obligor
while the liabilities remain unpaid, unless such assignment or transfer is
made expressly subject to this Subordination.
3. The Company further agrees that KCL, its agents or assigns, may
move or otherwise repossess and foreclose upon the Equipment whenever it
deems such action to be necessary or desirable in order to protect the KCL.
Interest and any security or other interest which KCL, its successors or
assigns, may have therein. If the Company obtains possession of the
Equipment, or any part thereof, by virtue of the Company Security Interest or
otherwise, KCL shall be entitled, as between the Company and KCL, to
immediate possession thereof.
4. This is a continuing subordination and KCL may continue,
without notice to the undersigned, to extend credit in the form of leases or
other accommodations or benefit, and/or to loan money to or for the account
of the Obligor in reliance on this Subordination Agreement until written
notice or revocation of this Subordination shall be delivered to KCL by the
Company. Such notice or revocation shall not affect this Subordination in
relation to the Financing then existing or any of the liabilities created
thereafter pursuant to any previous commitment of KCL to the Obligor or any
extensions, renewals or modifications of such liabilities and as to such
liabilities and any extension or renewals thereof, this Subordination shall
continue effective until the same shall have been fully discharged.
<PAGE>
IN WITNESS WHEREOF, the Company has executed, or has caused this
Agreement to be executed, as of the day and year first above written.
COMPANY:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
C/O U.S. BANCORP MORTGAGE COMPANY
By: /s/ Don Zimmerman
-------------------------
Name: Don Zimmerman
Title: Vice President
THE ABOVE SUBORDINATION AGREEMENT IS HEREBY
ACKNOWLEDGED AND ACCEPTED AS OF DEC. 18TH, 1996.
KEYCORP LEASING LTD.
By: /s/ Linda L. Huff
-------------------------
Name: Linda L. Huff
Title: Vice President
Regional Business Unit Manager
2
<PAGE>
STATE OF WASHINGTON )
)ss.:
COUNTY OF WHATCOM )
On this 12th day of December, 1996, before me the subscriber personally
appeared Don Zimmerman, who being by me duly sworn, did depose and say; that
(s)he resides at Bellingham, WA; that (s)he is a Vice President of U.S. Bank
of Washington, the corporation described in and which executed the foregoing
instrument, and that (s)he signed his/her name thereto by order of the Board
of Directors of said corporation.
/s/ Ginger Davis
- -----------------------------------
NOTARY PUBLIC
My Commission Expires: 9-19-99
[SEAL]
3
<PAGE>
EXHIBIT A
THE EQUIPMENT
QTY EQUIPMENT DESCRIPTION
- --- ---------------------
1 SASIB WS-20 SERIES II WRAPPER
20 GREMSER VACUUM FEEDERS AND ACCESSORIES
1 MULTI CONVEYOR COUNTER STACKER
1 MPI 2114 CUSTOM TOP PANEL PRINT AND APPLY LABELER WITH BAR CODE SCANNER
1 INTRALOX 180 DEGREE CONVEYOR
1 CALIPER MEASURING SYSTEM
1 IMPACT SYSTEM MANAGER MODULE
1 IMPACT GENERAL LEDGER MODULE
1 IMPACT ACCOUNTS PAYABLE MODULE
1 IMPACT ACCOUNTS RECEIVABLE MODULE
1 IMPACT CASH BOOKS MODULE
1 IMPACT INVENTORY CONTROL MODULE
1 IMPACT PURCHASE ORDER MODULE
1 IMPACT SALES ORDER PROCESSING MODULE
1 IMPACT SALES ANALYSIS MODULE
1 IMPACT BILL OF MATERIALS MODULE
1 IMPACT ESTIMATING MODULE
1 IMPACT WORK IN PROGRESS MODULE
1 IMPACT NET REQUIREMENTS PLANNING MODULE
1 IMPACT GRAPHICAL USER INTERFACE MODULE
1 IMPACT FIXED ASSETS MODULE
1 RETURN MERCHANDISE AUTHORIZATION
1 IMPACTINTERFACE (REMOTE SITE)
1 IMPACT REPORT WRITER MODULE
1 EDIT BASE MODULE
1 ODBC FOR IMPACT
1 IMPACT MICRO FOCUS RUNTIME SYSTEMS (OSX)
1 EIS SYSTEM 5 USER
32 SYSTEM INSTALLATION HOURS
200 IMPACT TRAINING HOURS
40 DATA CONVERSION HOURS
100 IMPLEMENTATION ASSISTANCE
1 ANNUAL LICENSE FEE
1 ANNUAL TELEPHONE SUPPORT
1 UNLIMITED 1ST QTR TELEPHONE SUPPORT
1 IMPLEMENTATION AND PROCEDURES GUIDE
1 AIX OPERATING SYSTEM
1 AIX MEDIA (CD ROM)
1 DIAGNOSTICS DISKETTES
1 AIX IBM CD ROM HYPERTEXT
1 IBM INFO EXPLORER
1 ICE TCP 64 USER
16 CONFIGURATION TIME
1 IBM RS/6000 POWER SERVER 39H
2 IBM SCSI2 FAST/WID ADAPTER
2 IBM 32MB-64MB RAM UPGRADE
2 IBM L-2 CAHCE, 1 MB
1 IBM 16 BIT DROP CABLE
1 IBM 4.2 GB FAST SCSI DISK
1 IBM 4.5 GB FAST DISK
4
<PAGE>
1 DDS-2 4 MM TAPE BACKUP
1 IBM RS/6000 CONSOLE CABLE
1 8 PORT SERIAL CONTROLLER
1 IBM 10 BASE T TRANSCEIVER
1 IBM ETHERNET CARD
1 IBM 3153 AMBER TERMINAL
1 APC SMART POWER
1 APC POWER CHUTE SOFTWARE
1 DDS AIX SHUTDOWN CABLE
1 VSIFAX/MODEM SERVER
1 MULTITECH MODEM FOR FAX
1 US ROBOTICS 28.8 K BAUD
1 MODEM
1 CTM 2000 INLINE HIGH SPEED HOLE PUNCH
1 FL SMITHE RH S/N: 263 RH
1 HOBBS DIE CUTTER MACHINE S/N: 16118
1 25 HP ROOTS VACUUM SYSTEM NEW
1 FL SMITHE TABBER
1 1000 W/SQUEEZE ROLL 36X45
2 LDR AJR TABLE 30 X 48
1 KLNGE LIFT HPV10B ELECTRIC 22"
1 RAYMOND MODEL 112 TM FREGOL WALKIE/RIDER 6000# WITH 27" X 48" FORKS
1 USED ROLAND SIX COLOR 28" X 40" OFFSET PRESS MODEL 600 S/N #6939
1 SR-200 STOESSER PLATEMAKER PACKAGE
1 CRATING
1 STOESSER FA-15HO DUAL FOLLING FILTER
1 R211 PEARSON USED S/N9302117638
1 SULLAIR 75HP ROTARY SCREW AIR COMPRESSOR ACAC 460/3/60
1 SULLUBE-32 LUBRICANT
1 HEAVY DUTY AIR FILTER
1 ODP PREMIUM EFFICIENT MOTOR
1 GRF300A GREAT LAKES AIR REFRIGER AIR DRYER-460/3/60
1 PAR-08F74A PARKER 1 1/2" FILTER W/METAL & SIGHT PAR DS506
1 PARKER AUTO DRAIN KIT PAROOF73E*P
1 PARKER 1-1/2" 350SCFM COALESCING FILTER W/METAL PAR-06D3N
1 PARKER 1/2" AUTODRIP LEG DRAIN
2 NEW SABER PAPER CUTTERS MODEL 115'S
S/N# 61685 & 61686
7 GAVCO CD30662448X L SHAPER DESKS W/CENTER DRAWER AND KEYBOARD DRAWER
30"X66" MAIN/24"X48" RETURN
4 GAVCO CD3048SP-SINGLE PEDESTAL DESK W/KEYBOARD DRAWER 30"X48"
1 GAVCO RC3672 CONFERENCE TABLE 36"X72" RACETRACK SHAPE
1 GAVCO CC2060-ALL STORAGE CREDENZA 20"DX60"L
1 GAVCO BD3672DP EXECUTIVE DESK 36"X72"
1 GAVCO BC2072K KNEESPACE CREDENZA 20"X72"
2 GAVCO B84 84"H/36"WX12"D BOOKCASE
6 FAUSTINO #1501L SIDE ARM CHAIRS
12 RUBBERMAID #620 KEYBOARD DRAWERS
5 BPI DIVIDER PANELS #DS7236 72"HX36"W
2 BPI DIVIDER PANELS #DS7230 72"HX30"W
5 BPI DIVIDER PANELS #DS7242 72"HX42"W
1 BPI #HC36 36" WIDE BINDER BIN FOR PANELS
7 BPI #HC30 30" WIDE BINDER BIN FOR PANELS
5
<PAGE>
EXHIBIT 10.6
[LOGO]
EQUIPMENT SCHEDULE NO. 04
EQUIPMENT SCHEDULE NO. 04 dated as of December 4, 1996 (this "Schedule")
between KEYCORP LEASING LTD. ("Lessor"), a Delaware corporation, and
GEOGRAPHICS, INC., a Washington corporation ("Lessee").
INTRODUCTION:
Lessor and Lessee have heretofore entered into that certain Master
Equipment Lease Agreement dated as of May 22, 1996 (the "Master Lease"; the
Master Lease and this Schedule hereinafter collectively referred to as, this
"Lease"). Unless otherwise defined herein, capitalized terms used herein
shall have the meanings specified in the Master Lease. The Master Lease
provides for the execution and delivery of a Schedule substantially in the
form hereof for the purpose of confirming the acceptance and lease of the
Equipment under this Lease as and when delivered by Lessor to Lessee in
accordance with the terms thereof and hereof.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
1. EQUIPMENT. Pursuant to the terms and conditions of this Lease, Lessor
hereby leases to Lessee, and Lessee hereby leases from Lessor, the equipment
listed on EXHIBIT A attached hereto (the "Equipment"). The aggregate Total
Cost of such Equipment is $892,549.19.
2. TERM. The initial Term of this Lease with respect to the Equipment
described on this Schedule shall commence on the date on which such Equipment
is delivered to Lessee, and, unless earlier terminated as provided herein,
shall expire on the eighty-four (84) month anniversary of the Rent
Commencement Date (the "Initial Term Expiration Date").
3. RENT PAYMENT DATES; RENT. Lessee hereby agrees to pay Rent for the
Equipment throughout the Initial Term in eighty-four (84) consecutive monthly
installments payable in arrears on the date which is one (1) month after the
Rent Commencement Date and on the same day of each month thereafter (each, a
"Rent Payment Date"). Each such installment of Rent shall be in an amount
equal to $14,247.31.
4. EQUIPMENT LOCATION; BILLING ADDRESS. The Equipment described on this
Schedule shall be located at, and except as otherwise provided in this Lease,
shall not be removed from, the following address: 1555 Odel Road, Blaine, WA
98231. The billing address of Lessee is as follows: GEOGRAPHICS, INC., P.O.
Box 1750, Blaine, WA 98231.
5. LESSEE'S PURCHASE AND RENEWAL OPTIONS. Lessee shall have the purchase
and renewal options set forth on the End of Lease Options Addendum attached
hereto and made a part hereof.
6. STIPULATED LOSS VALUE. There are no Stipulated Loss Values or Stipulated
Loss Value Supplements applicable to the Equipment described on this Schedule.
7. SECURITY AGREEMENT. To secure the prompt payment and performance as and
when due of all obligations and indebtedness of Lessee, now existing or
hereafter created, to Lessor pursuant to this Lease or otherwise, Lessee
hereby grants to Lessor a security interest in the Equipment and all
accessions, substitutions and replacements thereto and therefor, and proceeds
(cash and non-cash), including, without limitation, insurance proceeds
thereof (but without power of sale). In furtherance of the foregoing, Lessee
shall execute and deliver to Lessor, to be recorded at Lessee's expense,
Uniform Commercial Code financing statements, statements of amendment and
statements of continuation as reasonably may be required by Lessor to perfect
and maintain perfected the security interest granted by Lessee herein.
<PAGE>
8. NOTIFICATION OF TAX CONSEQUENCES. Lessee recognizes that, pursuant to
Section 18 of the Master Lease, it is Lessee's responsibility to include, if
required by Applicable Law, all equipment financed under this Lease in
Lessee's personal property tax returns and, if necessary, to pay any
resulting property tax bills. Lessor and Lessee acknowledge that personal
property tax policies vary from state to state and that, where uncertainty
exists as to a particular state's policies, Lessee shall contact its
attorneys or financial advisors (who may be familiar with such state's
personal property tax policy) for advice. It is expressly acknowledged by
Lessee that Lessor has made no warranties, statements or representations as
to such personal property tax matters, and Lessee hereby disclaims any
reliance on any such warranties, statements or representations made by Lessor
with respect thereto.
9. MODIFICATIONS TO MASTER LEASE. In addition to the modifications set
forth in Section 5 hereof, with respect to the Equipment described on this
Schedule, the Master Lease shall be modified as follows:
(a) The following shall be inserted as the penultimate sentence of
Section 11 of the Master Lease ("Use; Alterations"):
All such alterations, additions, modifications or improvements
immediately, and without further act, shall be deemed to constitute
items of Equipment and be fully subject to this Lease as if originally
leased hereunder.
(b) The following shall be inserted as the penultimate sentence of
Section 12 of the Master Lease ("Repairs and Maintenance"):
Upon installation, attachment or incorporation in, on or into such item
of Equipment, such replacement part immediately, and without further
act, shall be deemed to constitute an item of Equipment and be fully
subject to this Lease as if originally leased hereunder.
(c) Section 16(b) of the Master Lease ("Loss of or Damage to
Equipment") is hereby amended to delete subsection "(3)" and substitute the
following in its place:
(3) pay to Lessor an amount, with respect to such Item of Equipment,
equal to the Rent payable for such Item of Equipment for the remainder
of the Term, after discounting such Rent to present worth on the basis
of a per annum rate of discount equal to five percent (5%) from the
respective dates upon which such Rent would have been paid had the Loss
or Damage not occurred.
(d) Section 16(b) of the Master Lease ("Loss of or Damage to
Equipment") is hereby amended to delete the second to last sentence and
substitute the following in its place:
If Lessee replaces the Item of Equipment pursuant to subsection (b)
above, such replacement equipment shall immediately (and without
further act) be deemed to constitute Items of Equipment and be fully
subject to this Lease as if originally leased hereunder.
(e) Section 17(a) of the Master Lease ("Insurance") is hereby amended
to delete subsection "(1)" and substitute the following in its place:
(1) Insurance against all risks of physical loss or damage to the
Equipment (including theft and collision for Equipment consisting of
motor vehicles) in an amount not less than the full replacement value
thereof.
(f) As used in Section 22(a) of the Master Lease ("Events of Default"),
the term "Event of Default" shall also mean any of the following events: (1)
a change in control occurs in Lessee; or (2) the death or dissolution of
Lessee.
(g) Section 22(b) of the Master Lease ("Events of Default") is hereby
amended to delete subsection "(7)" and substitute the following in its place:
2
<PAGE>
(7) by written notice to Lessee specifying a payment date, may
demand that Lessee pay to Lessor, and Lessee shall pay to Lessor,
on the payment date specified in such notice, as liquidated damages
for loss of a bargain and not as a penalty, any unpaid Rent due
prior to the payment date specified in such notice plus the
following amount which Lessor shall specify in such notice
(together with interest on such amount at the Late Payment Rate
from the payment date specified in such notice to the date of
actual payment): an amount, with respect to an Item of Equipment,
equal to the Rent payable for such Item of Equipment for the
remainder of the then current Term thereof, after discounting such
Rent to present worth as of the payment date specified in such
notice on the basis of a per annum rate of discount equal to five
percent (5%) from the respective dates upon which such Rent would
have been paid had this Lease not been canceled or terminated.
(h) Section 22(b) of the Master Lease ("Events of Default") is
hereby amended as follows: (1) with respect to Section 22(b)(4), the word
"terminate" is hereby deleted and the words "cancel or terminate" are hereby
substituted in its place; and (2) with respect to Section 22(b)(6), the word
"termination" is hereby deleted and the words "cancellation or termination"
are hereby substituted in its place.
10. GOVERNING LAW. This Schedule is being delivered in the State of
New York and shall in all respects be governed by, and construed in
accordance with, the laws of the State of New York, including all matters of
construction, validity and performance.
11. COUNTERPARTS. This Schedule may be executed in any number of
counterparts, each executed counterpart constituting an original but all
together one and the same instrument.
12. PERSONAL PROPERTY TAX. To insure Lessee's compliance with the
provisions of the Lease with respect to the payment of personal property
taxes on the Equipment described on this Schedule, Lessee hereby covenants
and agrees that, unless otherwise directed in writing by Lessor or otherwise
required by law, Lessee will list itself as owner of all Items of Equipment
for property tax purposes. Except in those jurisdictions in which Lessor is
required to list itself as owner of all such Items of Equipment, upon receipt
by Lessee of any property tax bill pertaining to such Items of Equipment from
the appropriate taxing authority, Lessee will promptly pay all such taxes
when due. In those jurisdictions in which Lessor is required to list itself
as owner of all such Items of Equipment, upon receipt by Lessee of any
property tax bill pertaining to such Items of Equipment, Lessee will promptly
forward to Lessor such property tax bill and related payment. Upon receipt by
Lessor of any such property tax bill and related payment, Lessor will pay
such tax.
13. ADDITIONAL ADDENDA. In addition to the End of Lease Options
Addendum, please see the following addenda to this Schedule, attached hereto
and made a part hereof, for additional terms and conditions governing the
leasing of the Equipment described on this Schedule: none.
14. MORE THAN ONE LESSEE. If more than one person or entity executes
this Schedule, and all addenda or other documents executed in connection
herewith, as "Lessee" the obligations of "Lessee" contained herein and
therein shall be deemed joint and several and all references to "Lessee"
shall apply both individually and jointly.
15. RELATIONSHIP TO MASTER LEASE; FURTHER ASSURANCES. This Schedule
shall be construed in connection with and as part of the Lease, and all terms
and conditions contained in the Master Lease are hereby incorporated herein
by reference with the same force and effect as if such terms and conditions
were fully-stated herein. By execution of this Schedule, Lessee and Lessor
reaffirm all terms and conditions of the Master Lease except as they may be
modified hereby. To the extent that any of the terms and conditions of this
Schedule are contrary to or inconsistent with any terms and conditions of the
Master Lease, the terms and conditions of this Schedule shall govern. LESSEE
HEREBY CERTIFIES TO LESSOR THAT THE REPRESENTATIONS AND WARRANTIES MADE BY
LESSEE IN THE MASTER LEASE (INCLUDING, WITHOUT LIMITATION, SECTION 31
THEREOF) ARE TRUE AND CORRECT IN ALL MATERIAL RESPECTS AS OF THE DATE OF THIS
SCHEDULE WITH THE SAME EFFECT AS THOUGH MADE ON AND AS OF SUCH DATE. Lessee
shall take such additional actions and execute and deliver such additional
documents as Lessor shall deem necessary from time to time to effectuate the
terms of the Lease.
3
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Schedule to be
duly executed and delivered on the day and year first above written.
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Linda L. Huff
----------------------------
Name: Linda L. Huff
Title: Vice President
Regional Business Unit Manager
LESSEE:
GEOGRAPHICS, INC.
By: /s/ Michael Bayless
----------------------------
Name: Michael Bayless
Title: Corporate Controller
4
<PAGE>
EXHIBIT A
TO EQUIPMENT SCHEDULE NO. 04
DATED AS OF DECEMBER 4, 1996
TO MASTER EQUIPMENT LEASE AGREEMENT DATED AS OF MAY 22, 1996
VENDOR: RAINBOW PACKAGING
3140 S. VISTA DRIVE
CHANDLER, AZ 86248
QTY EQUIPMENT DESCRIPTION
- --- ---------------------
1 SASIB WS-20 SERIES II WRAPPER
20 GREMSER VACUUM FEEDERS AND ACCESSORIES
1 MULTI CONVEYOR COUNTER STACKER
1 MPI 2114 CUSTOM TOP PANEL PRINT AND APPLY LABELER WITH BAR CODE
SCANNER
1 INTRALOX 180 DEGREE CONVEYOR
1 CALIPER MEASURING SYSTEM
5
<PAGE>
[LOGO] KEYCORP LEASING LTD.
END OF LEASE OPTIONS ADDENDUM
TO EQUIPMENT SCHEDULE NUMBER 04
TO MASTER EQUIPMENT LEASE AGREEMENT DATED AS OF MAY 22, 1996
BETWEEN KEYCORP LEASING LTD., AS LESSOR.
AND GEOGRAPHICS, INC., AS LESSEE.
(Dollar Purchase Option)
This End of Lease Options Addendum is annexed to, and made a part of,
the above-referenced Equipment Schedule and Master Equipment Lease Agreement,
as it relates to such Equipment Schedule (collectively, the "Lease"). Unless
otherwise specified herein, all capitalized terms shall have the meanings
ascribed to them in the Lease. Lessor and Lessee hereby agree as follows:
LESSEE'S PURCHASE AND RENEWAL OPTIONS. (a) With respect to the Equipment
described on this Schedule, Section 32 of the Master Lease ("Renewal and
Purchase Options") is hereby deleted in its entirety.
(b) On the Initial Term Expiration Date, Lessee shall pay to Lessor an
amount equal to $1.00. Upon payment in full by Lessee of all Rent (and all
other sums) payable to Lessor hereunder, Lessor shall release its interest
in the Equipment.
Except as modified hereby, all of the terms, covenants and conditions of
the Lease shall remain in full force and effect and are in all respects
hereby ratified and affirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed this End of Lease
Options Addendum as of December 4, 1996.
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Linda L. Huff
---------------------------------------
Name: Linda L. Huff
Title: Vice President
Regional Business Unit Manager
LESSEE:
GEOGRAPHICS, INC
By: /s/ Michael Bayless
------------------------------------
Name: Michael Bayless
Title: CORPORATE CONTROLLER
<PAGE>
EXHIBIT 10.7
[LOGO]
EQUIPMENT SCHEDULE NO. 04
EQUIPMENT SCHEDULE NO. 04 dated as of May 23, 1997 (this "Schedule")
between KEYCORP LEASING LTD. ("Lessor"), a Delaware corporation, and
GEOGRAPHICS, INC., a Wyoming corporation ("Lessee").
INTRODUCTION:
Lessor and Lessee have heretofore entered into that certain Master
Equipment Lease Agreement dated as of May 22, 1996 (the "Master Lease"; the
Master Lease and this Schedule hereinafter collectively referred to as, this
"Lease"). Unless otherwise defined herein, capitalized terms used herein
shall have the meanings specified in the Master Lease. The Master Lease
provides for the execution and delivery of a Schedule substantially in the
form hereof for the purpose of confirming the acceptance and lease of the
Equipment under this Lease as and when delivered by Lessor to Lessee in
accordance with the terms thereof and hereof.
NOW, THEREFORE, in consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows:
1. EQUIPMENT. Pursuant to the terms and conditions of this Lease,
Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
equipment listed on EXHIBIT A attached hereto (the "Equipment"). The aggregate
Total Cost of such Equipment is $2,204,898.52.
2. TERM. The Initial Term of this Lease with respect to the Equipment
described on this Schedule shall commence on the date on which such Equipment
is delivered to Lessee, and, unless earlier terminated as provided herein,
shall expire on a date which is eighty-four (84) months after the Rent
Commencement Date (the "Initial Term Expiration Date").
3. RENT PAYMENT DATES; RENT. Lessee hereby agrees to pay Rent for the
Equipment throughout the Initial Term in eighty-four (84) consecutive
monthly installments payable in advance on the Rent Commencement Date and on
the same day each month thereafter (each, a "Rent Payment Date"). Each such
installment of Rent shall be in an amount equal to $35,535.99.
4. EQUIPMENT LOCATION; BILLING ADDRESS. The Equipment described on this
Schedule shall be located at, and except as otherwise provided in this Lease,
shall not be removed from, the following address: 1555 Odell Road, Blaine, WA
98231. The billing address of Lessee is as follows: GEOGRAPHICS, INC., P.O.
Box 1750, Blaine, WA 98231.
5. LESSEE'S PURCHASE AND RENEWAL OPTIONS. Lessee shall have the
purchase and renewal options set forth on the End of Lease Options Addendum
attached hereto and made a part hereof.
6. STIPULATED LOSS VALUE. There are no Stipulated Loss Values or
Stipulated Loss Value Supplements applicable to the Equipment described on
this Schedule.
7. SECURITY AGREEMENT. To secure the prompt payment and performance as
and when due of all obligations and indebtedness of Lessee, now existing or
hereafter created, to Lessor pursuant to this Lease or otherwise, Lessee
hereby grants to Lessor a security interest in the Equipment and all
accessions, substitutions and replacements thereto and therefor, and proceeds
(cash and non-cash), including, without limitation, insurance proceeds
thereof (but without power of sale). In furtherance of the foregoing, Lessee
shall execute and deliver to Lessor, to be recorded at Lessee's expense,
Uniform Commercial Code financing statements, statements of amendment and
statements of continuation as reasonably may be required by Lessor to perfect
and maintain perfected the security interest granted by Lessee herein.
<PAGE>
8. NOTIFICATION OF TAX CONSEQUENCES. Lessee recognizes that, pursuant
to Section 18 of the Master Lease, it is Lessee's responsibility to include,
if required by Applicable Law, all equipment financed under this Lease in
Lessee's personal property tax returns and, if necessary, to pay any
resulting property tax bills. Lessor and Lessee acknowledge that personal
property tax policies vary from state to state and that, where uncertainty
exists as to a particular state's policies, Lessee shall contact its
attorneys or financial advisors (who may be familiar with such state's
personal property tax policy) for advice. It is expressly acknowledged by
Lessee that Lessor has made no warranties, statements or representations as
to such personal property tax matters, and Lessee hereby disclaims any
reliance on any such warranties, statements or representations made by Lessor
with respect thereto.
9. MODIFICATIONS TO MASTER LEASE. In addition to the modifications set
forth in Section 5 hereof, with respect to the Equipment described on this
Schedule, the Master Lease shall be modified as follows:
(a) The following shall be inserted as the penultimate sentence of
Section 11 of the Master Lease ("Use; Alterations"):
All such alterations, additions, modifications or improvements
immediately, and without further act, shall be deemed to constitute
items of Equipment and be fully subject to this Lease as if
originally leased hereunder.
(b) The following shall be inserted as the penultimate Section 12
of the Master Lease ("Repairs and Maintenance"):
Upon installation, attachment or incorporation in, on or into such
item of Equipment, such replacement part immediately, and without
further act, shall be deemed to constitute an Item of Equipment and
be fully subject to this Lease as if originally leased hereunder.
(c) Section 16(b) of the Master Lease ("Loss of or Damage to
Equipment") is hereby amended to delete subsection "(3)" and substitute the
following in its place:
(3) pay to Lessor an amount, with respect to such Item of Equipment,
equal to the Rent payable for such Item of Equipment for the
remainder of the Term, after discounting such Rent to present worth
on the basis of a per annum rate of discount equal to five percent
(5%) from the respective dates upon which such Rent would have been
paid had the Loss or Damage not occurred.
(d) Section 16(b) of the Master Lease ("Loss of or Damage to
Equipment") is hereby amended to delete the second to last sentence and
substitute the following in its place:
If Lessee replaces the Item of Equipment pursuant to subsection (b)
above, such replacement equipment shall immediately (and without
further act) be deemed to constitute Items of Equipment and be fully
subject to this Lease as if originally leased hereunder.
(e) Section 17(a) of the Master Lease ("Insurance") is hereby
amended to delete subsection "(1)" and substitute the following in its place:
(1) Insurance against all risks of physical loss or damage to the
Equipment (including theft and collision for Equipment consisting
of motor vehicles) in an amount not less than the full replacement
value thereof.
(f) As used in Section 22(a) of the Master Lease ("Events of
Default"), the term "Event of Default" shall also mean any of the following
events: (1) a change in control occurs in Lessee; or (2) the death or
dissolution of Lessee.
2
<PAGE>
(g) Section 22(b) of the Master Lease ("Events of Default") is
hereby amended to delete subsection "(7)" and substitute the following in its
place:
(7) by written notice to Lessee specifying a payment date, may
demand that Lessee pay to Lessor, and Lessee shall pay to
Lessor, on the payment date specified in such notice, as
liquidated damages for loss of a bargain and not as a penalty,
any unpaid Rent due prior to the payment date specified in such
notice plus the following amount which Lessor shall specify in
such notice (together with interest on such amount at the Late
Payment Rate from the payment date specified in such notice to
the date of actual payment): an amount, with respect to an Item
of Equipment, equal to the Rent payable for such Item of
Equipment for the remainder of the then current Term thereof,
after discounting such Rent to present worth as of the payment
date specified in such notice on the basis of a per annum rate
of discount equal to five percent (5%) from the respective dates
upon which such Rent would have been paid had this Lease not
been canceled or terminated.
(h) Section 22(b) of the Master Lease ("Events of Default") is
hereby amended as follows: (1) with respect to Section 22(b)(4), the word
"terminate" is hereby deleted and the words "cancel or terminate" are hereby
substituted in its place; and (2) with respect to Section 22(b)(6), the word
"termination" is hereby deleted and the words "cancellation or termination"
are hereby substituted in its place.
10. GOVERNING LAW. This Schedule is being delivered in the State of
New York and shall in all respects be governed by, and construed in
accordance with, the laws of the State of New York, including all matters of
construction, validity and performance.
11. COUNTERPARTS. This Schedule may be executed in any number of
counterparts, each executed counterpart constituting an original but all
together one and the same instrument.
12. PERSONAL PROPERTY TAX. To insure Lessee's compliance with the
provisions of the Lease with respect to the payment of personal property
taxes on the Equipment described on this Schedule, Lessee hereby covenants
and agrees that, unless otherwise directed in writing by Lessor or otherwise
required by law, Lessee will list itself as owner of all Items of Equipment
for property tax purposes. Except in those jurisdictions in which Lessor is
required to list itself as owner of all such Items of Equipment, upon receipt
by Lessee of any property tax bill pertaining to such Items of Equipment from
the appropriate taxing authority, Lessee will promptly pay all such taxes
when due. In those jurisdictions in which Lessor is required to list itself
as owner of all such Items of Equipment, upon receipt by Lessee of any
property tax bill pertaining to such Items of Equipment, Lessee will promptly
forward to Lessor such property tax bill and related payment. Upon receipt by
Lessor of any such property tax bill and related payment, Lessor will pay
such tax.
13. ADDITIONAL ADDENDA. In addition to the End of Lease Options
Addendum, please see the following addenda to this Schedule, attached hereto
and made a part hereof, for additional terms and conditions governing the
leasing of the Equipment described on this Schedule: none.
14. MORE THAN ONE LESSEE. If more than one person or entity executes
this Schedule, and all addenda or other documents executed in connection
herewith, as "Lessee", the obligations of "Lessee" contained herein and
therein shall be deemed joint and several and all references to "Lessee"
shall apply both individually and jointly.
15. RELATIONSHIP TO MASTER LEASE; FURTHER ASSURANCES. This Schedule
shall be construed in connection with and as part of the Lease, and all terms
and conditions contained in the Master Lease are hereby incorporated herein
by reference with the same force and effect as if such terms and conditions
were fully stated herein. By execution of this Schedule, Lessee and Lessor
reaffirm all terms and conditions of the Master Lease except as they may be
modified hereby. To the extent that any of the terms and conditions of this
Schedule are contrary to or inconsistent with any terms and conditions of the
Master Lease, the terms and conditions of this Schedule shall govern. LESSEE
HEREBY CERTIFIES TO LESSOR THAT THE REPRESENTATIONS AND
3
<PAGE>
WARRANTIES MADE BY LESSEE IN THE MASTER LEASE (INCLUDING, WITHOUT LIMITATION,
SECTION 31 THEREOF) ARE TRUE AND CORRECT IN ALL MATERIAL RESPECTS AS OF THE
DATE OF THIS SCHEDULE WITH THE SAME EFFECT AS THOUGH MADE ON AND AS OF SUCH
DATE. Lessee shall take such additional actions and execute and deliver such
additional documents as Lessor shall deem necessary from time to time to
effectuate the terms of the Lease.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Schedule to be
duly executed and delivered on the day and year first above written.
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Linda L. Huff
-----------------------------------
Name: Linda L. Huff
Title: Vice President
Regional Business Unit Manager
LESSEE:
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
-----------------------------------
Name: Ronald S. Deans
Title: CEO
4
<PAGE>
EXHIBIT A
TO EQUIPMENT SCHEDULE NO. 04
DATED AS OF MAY 23, 1997
TO MASTER EQUIPMENT LEASE AGREEMENT DATED AS OF MAY 22, 1996
VENDOR: MAN ROLAND INC.
P.O. BOX 6500
CHICAGO, IL 60680-6500
QTY EQUIPMENT DESCRIPTION
- --- ---------------------
1 DEMONSTRATION MAN ROLAND 706 6/C PRINTING PRESS S/N: 7620 WITH ALL
STANDARD EQUIPMENT AND RELATED ACCESSORIES AS DESCRIBED IN
MACHINERY CONTRACT DATED 1/17/97
5
<PAGE>
[logo]
THIS IS A CERTIFICATE ACKNOWLEDGING
ACCEPTANCE OF THE EQUIPMENT FOR
PURPOSES OF THE BELOW-REFERENCED LEASE.
THIS IS NOT A DELIVERY RECEIPT.
LESSEE ACKNOWLEDGMENT
(Certificate of Acceptance)
Lessee Name: GEOGRAPHICS, INC.
All the items of Equipment covered by Equipment Schedule No. 04 to
Master Equipment Lease Agreement dated as of May 22, 1996 (the "Lease")
between KeyCorp Leasing Ltd., as lessor ("KCL"), and the undersigned, as
lessee, (a) were received by the undersigned, (b) are satisfactory to the
undersigned in all respects and are acceptable to the undersigned for lease
under the Lease, (c) are suitable for the undersigned's purposes, (d) are in
good order, repair and condition, (e) have been installed and operate
properly, and (f) are subject to all of the terms and conditions of the
Lease (including, without limitation, Section 3 thereof).
To the extent that Article 2A ("Article 2A") of the Uniform Commercial
Code ("UCC") applies to the characterization of the Lease, the undersigned
hereby agree(s) that the Lease is a "Finance Lease" as defined therein. The
undersigned acknowledge(s): (i) that the undersigned has selected the
"Supplier" (as defined in the UCC) and has directed KCL to purchase the
Equipment from the Supplier in connection with the Lease, and (ii) that the
undersigned has been informed in writing in the Lease, before the
undersigned's execution of thereof, that the undersigned is entitled under
Article 2A to the promises and warranties, including those of any third
party, provided to KCL by the Supplier in connection with or as part of the
Purchase Agreement (as defined in the Lease), and that the undersigned may
communicate with the Supplier and receive an accurate and complete statement
of those promises and warranties, including any disclaimers and limitations
of them or of remedies.
Dated: , 19
--------------------- -----
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
---------------------
Name: Ronald S. Deans
Title: CEO
<PAGE>
[logo]
END OF LEASE OPTIONS ADDENDUM
TO EQUIPMENT SCHEDULE NUMBER 05
TO MASTER EQUIPMENT LEASE AGREEMENT DATES AS OF MAY 22, 1996
BETWEEN KEYCORP LEASING LTD., AS LESSOR,
AND GEOGRAPHICS, INC., AS LESSEE.
(Dollar Purchase Option)
THIS END OF LEASE OPTIONS ADDENDUM is annexed to, and made a part of,
the above-referenced Equipment Schedule and Master Equipment Lease Agreement,
as it relates to such Equipment Schedule (collectively, the "Lease"). Unless
otherwise specified herein, all capitalized terms shall have the meanings
ascribed to them in the Lease. Lessor and Lessee hereby agree as follows:
LESSEE'S PURCHASE AND RENEWAL OPTIONS. (a) With respect to the
Equipment described on this Schedule, Section 32 of the Master
Lease ("Renewal and Purchase Options") is hereby deleted in its
entirety.
(b) On the Initial Term Expiration Date, Lessee shall pay to Lessor
an amount equal to $1.00. Upon payment in full by Lessee of all Rent
(and all other sums) payable to Lessor hereunder, Lessor shall release
its interest in the Equipment.
Except as modified hereby, all of the terms, covenants and conditions
of the Lease shall remain in full force and effect and are in all respects
hereby ratified and affirmed.
IN WITNESS WHEREOF, Lessor and Lessee have executed this End of Lease
Options Addendum as of May 23, 1997.
LESSOR:
KEYCORP LEASING LTD.
By: /s/ Linda L. Huff
---------------------------------
Name: Linda L. Huff
Title: Vice President
Regional Business Unit Manager
LESSEE:
GEOGRAPHICS, INC.
By: /s/ Ronald S. Deans
---------------------------------
Name: RONALD S. DEANS
Title: CEO
<PAGE>
EXHIBIT 10.8
GRAHAM'S GRAPHICS PTY LIMITED
AND
GEOGRAPHICS, INC
---------------------------------
AGREEMENT FOR SALE OF BUSINESS
GRAHAM'S GRAPHICS
--------------------------------
BLESSINGTON JUDD
[LOGO]
Solicitors
Level 9
45 Clarence Street
SYDNEY NSW 2000
Tel: (02) 9238 6000
Fax: (02) 9221 5692
DX 1068 SYDNEY
eMail: [email protected]
ref:N:\SMF\961328a.doc
<PAGE>
TABLE OF CONTENTS
CLAUSE PAGE NO.
1. DEFINITIONS AND INTERPRETATION .............................. 1
1.1 Definitions ............................................. 1
1.2 Interpretation .......................................... 3
2. AGREEMENT TO SELL AND PURCHASE .............................. 4
2.1 Sale and Purchase ....................................... 4
2.2 Title and Property ...................................... 4
3. PURCHASE PRICE .............................................. 5
4. LIABILITY FOR LEASED ASSETS ................................ 5
5. CONDUCT OF THE BUSINESS PENDING COMPLETION .................. 5
5.1 Liability for the Business .............................. 5
5.2 Product Warranties ...................................... 6
6. COMPLETION .................................................. 6
6.1 Time and Place of Completion ............................ 6
6.2 Obligations of the Vendor at Completion ................. 6
6.3 Obligations of the Purchaser at Completion .............. 7
7. PERSONNEL ................................................... 7
7.1 Continuation of Employment .............................. 7
7.2 Vendor Liable for Employee Entitlements ................. 7
8. DEBTS AND LIABILITIES OF BUSINESS ........................... 8
9. TRADE DEBTORS ............................................... 8
10. WARRANTIES .................................................. 8
10.1 Vendor's Warranties .................................... 8
10.2 Vendor's Indemnity ..................................... 11
10.3 Purchaser's Warranties ................................. 11
11. RESTRAINT ................................................... 12
11.1 Restraint Obligation ................................... 12
11.2 Reasonableness of Restraint ............................. 12
11.3 Purchaser Breach ....................................... 13
11.4 Termination of Employment .............................. 13
12. CONFIDENTIALITY ............................................. 13
12.1 Obligation ............................................. 13
12.2 Survival ............................................... 13
13. COSTS AND STAMP DUTY ........................................ 14
13.1 Costs Generally ........................................ 14
13.2 Stamp Duty ............................................. 14
<PAGE>
14. NOTICES ..................................................... 14
14.1 Delivery ............................................... 14
14.2 Receipt ................................................ 14
14.3 Addresses for Notices .................................. 15
15. GENERAL ..................................................... 15
15.1 Whole Agreement ....................................... 15
15.2 Amendment ............................................. 16
15.3 Counterparts and Multiple Originals ................... 16
15.4 Waiver ................................................ 16
15.5 Severance ............................................. 16
15.6 Proper Law ............................................ 16
15.7 Attorneys ............................................. 17
15.8 Assignment ............................................ 17
15.9 Merger ................................................ 17
15.10 Further Assurances .................................... 17
SCHEDULE ONE .................................................... 18
SCHEDULE TWO .................................................... 19
<PAGE>
THIS AGREEMENT is made on 26th November 1996
BETWEEN: GRAHAM'S GRAPHICS PTY LIMITED [ACN: 003 781 708]
a company incorporated in the State of New South
Wales, Australia and having its registered office at
Suite 1, Level 5, 579 Harris Street, Ultimo (VENDOR);
AND: GEOGRAPHICS, INC a company duly incorporated in the State
of Wyoming, United States of America and having its
registered office in the State of Washington at 400 North
Commercial Street, Bellingham in that State (PURCHASER);
RECITALS
A. The Vendor carries on the Business at the Premises.
B. The Vendor has, or will on Completion, have legal title to the Assets
free of all Encumbrances.
C. The Vendor employs the Employees in the conduct of the Business.
D. The Vendor has agreed to sell and the Purchaser has agreed to purchase
the Business and the Assets on the terms set out in this Agreement.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS AND INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires, the following
words have these meanings:
ADJUSTMENT DATE means 1 July 1996;
ASSETS means the assets of and related to the Business on the
Adjustment Date and includes the Stock, the Plant, the Business Names, the
Customer List, the Trade Debtors and the goodwill of the Business;
<PAGE>
2
ASSOCIATE means any related body corporate, director or substantial
shareholder (as that term is defined section 708(4) of the Corporations Law
assuming that the corporation is a company within section 707(1) of the
Corporations Law) or a person described in section 15 of the
Corporations Law, as if the reference to the "primary person" in that
section were a reference to each party, as appropriate;
BUSINESS means the business of the Vendor of importing and distributing
stationery and graphic arts supplies;
BUSINESS DAY means a day on which banks are open for general banking
business in Sydney other than a Saturday or Sunday;
BUSINESS LOAN means the loan with MLC Building Society Limited which at
the Adjustment Date was $87,037.50.
BUSINESS NAME means the registered business name "Geotype Australia"
registered number L0669045 in the Register of Business Names maintained
by the Department of Business and Consumer Affairs for New South Wales;
COMPLETION means completion of the sale and purchase of the Business in
accordance with clause 6;
COMPLETION DATE means 1st December 1996 or such other date as may be
agreed in writing by the parties;
CUSTOMER means customers of the Business;
EMPLOYEES means the persons employed by the Vendor in the Business,
particulars of whose names, salaries and dates of commencement of
employment are set out in Schedule One;
EMPLOYMENT AGREEMENT means the agreement to be entered into at
Completion with Mr Graham Hanrahan;
<PAGE>
3
ENCUMBRANCE means mortgage, pledge, lien, charge, assignment by way of
security, hypothecation, secured interest, title retention arrangement,
preferential right, trust arrangement or any arrangement having the
same or an equivalent commercial effect or any agreement to create such
an arrangement;
FAULTLESS TERMINATION has the meaning given to that term in clause 11.4;
FINANCIAL ACCOUNTS means the financial accounts of the Vendor for the
year ended 30 June 1996 annexed and marked "A";
LEASED ASSETS means the items listed in Schedule Two;
PLANT means the equipment, machinery, furniture, fixtures and fittings
situated in the Premises and used by the Vendor in carrying on the
Business;
PREMISES means the premises at which the Business is carried on at 3/32
Lillian Fowler Place, Marrickville in the State of New South Wales;
PURCHASE PRICE means the purchase price for the Business;
STOCK means all supplies, packaging and containers and other inventory
used, sold or supplied in connection with the Business including items
of stock in transit;
TRADE DEBTORS means all money owing by Customers as well as any other
rights to payment arising from the operating of the Business before the
Adjustment Date but not paid by the Adjustment Date.
1.2 INTERPRETATION
In this Agreement unless the contrary intention appears:
(a) words denoting the singular include the plural and vice versa;
(b) words denoting individuals or persons include corporations and vice
versa;
(c) headings are for convenience only and do not affect interpretation;
<PAGE>
4
(d) references to any agreement or document are to that agreement or
document (and, where applicable, any of its provisions) as amended,
novated, supplemented or replaced from time to time;
(e) references to any party to this Agreement, include that party's
executors, administrators, substitutes, successors and permitted
assigns;
(f) a reference to "$" is a reference to Australian dollars unless
otherwise specified;
(g) a reference to a Recital, clause or Schedule is to a recital, clause
or schedule to this Agreement; and
(h) a reference to any legislation or legislative provision includes any
statutory modification of or re-enactment of, or substitution for, and
any subordinate legislation under, that legislation or legislative
provision.
2. AGREEMENT TO SELL AND PURCHASE
2.1 SALE AND PURCHASE
The Vendor as beneficial owner agrees to sell and the Purchaser agrees
to purchase from the Vendor the Business and the Assets and all of the
Vendor's right title and interest in and to the Business and the Assets
free from any Encumbrance or third party interests for the Purchase
Price, subject to and terms and conditions of this Agreement.
2.2 TITLE AND PROPERTY
Title to and property in the Business and in the Assets:
(a) remains with the Vendor until Completion; and
(b) passes to the Purchaser on and from Completion.
<PAGE>
5
3. PURCHASE PRICE
3.1 The Purchase Price for the Business and the Assets of the Business is
the sum of Three Hundred and Four Thousand Three Hundred and Thirty Six
Dollars and Twenty Seven Cents ($304,366.27).
3.2 The Purchase Price shall be paid and satisfied as follows:
(i) by the payment to the Vendor of the sum of $50,529.17 on Completion;
(ii) by the issue to the Vendor on Completion of 50,000 ordinary shares
in the capital of the Purchaser, such shares to be issued as fully
paid;
(iii) by the issue to the Vendor on Completion of an option to acquire
up to 50,000 ordinary shares in the capital of the Purchaser at
an issue price of US$4.00, such option to be exercised within
five (5) years from Completion, and to contain such conditions
and restrictions as are customary in transactions of this sort or
are required by securities regulatory authorities.
4. LIABILITY FOR LEASED ASSETS
The Purchaser agrees on Completion to take over the burden and benefit
of the Leases of the Leased Assets and the Purchaser will as and from
Completion indemnify the Vendor and keep the Vendor indemnified and all
other the Lessees or Guarantors of any Leases of Leased Assets in
respect of all liabilities arising under those Leases after the
Completion Date.
5. CONDUCT OF THE BUSINESS PENDING COMPLETION
5.1 LIABILITY FOR THE BUSINESS
(a) The Vendor is liable for all acts and omissions in the conduct of
the Business up to the Adjustment Date.
<PAGE>
6
(b) The Purchaser is liable for all acts and omissions in the conduct
of the Business after the Adjustment Date and indemnifies the
Vendor against all liability of any description arising in respect
of all such acts or omissions.
(c) The Vendor shall be entitled to the takings and profits of the
Business up to the Adjustment Date, from which date the Purchaser
shall be entitled to the same.
5.2 PRODUCT WARRANTIES
The Vendor will indemnify the Purchaser in connection with all costs and
expenses associated with warranty claims that arise from warranties
given to Customers in relation to the sale of any stock items prior to
the Adjustment Date. The Purchaser will, however, not be entitled to
recover any profit margin from the Vendor in respect of such warranty
claims. Also, the Vendor will not be responsible for any costs or
expenses associated with claims which are not warranty claims.
6. COMPLETION
6.1 TIME AND PLACE OF COMPLETION
Completion must occur at the Premises at 11.00 am or at any other time
or place as agreed in writing by the parties.
6.2 OBLIGATIONS OF THE VENDOR AT COMPLETION
At Completion, the Vendor is obliged to confer on the Purchaser title
to, and place the Purchaser in effective possession and control of the
Business and the Assets and, to this end, the Vendor must deliver or
cause to be delivered to the Purchaser:
(a) at the Premises, all of the Stock and the Plant;
<PAGE>
7
(b) at the place of Completion, the certificates of registration for each
of the Business Names together with forms sufficient to enable the
Purchaser to become the registered proprietor of the Business Names,
all duly executed by the Vendor;
(c) at the place of Completion, all documents relating to the Business
necessary for it to be carried on;
(d) at the place of Completion, all other documents which are reasonably
required by the Purchaser to vest title to and possession of the
Assets and the full benefit and possession of the Business in the
Purchaser including, without limitation, transfers of such of the
permits and licences held by the Vendor for the purpose of conducting
the Business and which are capable of being transferred by the Vendor;
6.3 OBLIGATIONS OF THE PURCHASER AFTER COMPLETION
The Purchaser undertakes within fourteen (14) days of Completion to
obtain a release of all securities presently lodged to secure the
Business Loan.
7. PERSONNEL
7.1 CONTINUATION OF EMPLOYMENT
The Purchaser agrees that each of the Employees will be employed on the
same or substantially similar terms as those which apply to them on the
Completion Date including but not limited to the salaries specified in
Schedule One.
7.2 VENDOR LIABLE FOR EMPLOYEE ENTITLEMENTS
The Vendor will be responsible for and must adjust with the Purchaser as
at the Adjustment Date the amount of the accrued employee entitlements
specified in Schedule One and shall indemnify the Purchaser, against all
claims in respect of any entitlement as against the Vendor by all
Employees up to the Adjustment Date.
<PAGE>
8
8. DEBTS AND LIABILITIES OF BUSINESS
8.1 On Completion, the Purchaser will assume the following debts and
liabilities of the Vendor disclosed in the Financial Accounts in respect
of the Business as at the Adjustment Date and indemnifies the Vendor
against all liability arising from any and all claims made in relation
to those debts and liabilities:
Trade Creditors- $85,970.55
Other Creditors- $18,644.75
Business Loan (unsecured loan)- $87,037.50
8.2 The Vendor shall otherwise be liable for all other debts and liabilities
of the Business up to the Adjustment Date.
9. TRADE DEBTORS
9.1 The Purchaser shall be entitled to all amounts owing by Trade Debtors as
at the Adjustment Date.
9.2 The Vendor agrees to allow the Purchaser to collect all amounts due by
Trade Debtors on the Vendor's behalf and to retain all amounts so
collected.
10. WARRANTIES
10.1 VENDOR'S WARRANTIES
The Vendor warrants to the Purchaser, as an inducement to the Purchaser
to enter into this Agreement and to purchase the Business and the
Assets, and it is a condition of this Agreement that each statement set
out in this clause is true, complete and accurate, (unless the context
indicates otherwise) both at the date of this Agreement and at the
Completion Date.
<PAGE>
9
(a) The Vendor has full corporate power and lawful authority to execute
and deliver this Agreement and to consummate and perform or cause to
be performed its obligations under it.
(b) This Agreement constitutes the legal, valid and binding obligation
of the Vendor enforceable in accordance with its terms by
appropriate legal remedy.
(c) The Vendor is the sole legal and beneficial owner of the Business.
(d) The Vendor has or will at Completion have full right, title and
interest in and to sell the Business and the Assets free from any
Encumbrance or third party interests other than as herein disclosed.
(e) The Vendor has not disposed of, agreed to dispose of or granted any
option to any person to purchase the Business or any of the Assets.
(f) The Assets will be insured for their full replacement value from
date of this Agreement until Completion.
(g) This Agreement and Completion do not conflict with or result in a
breach of or default under any provision of its memorandum and
articles of association or any material term or provision of any
agreement or deed or any writ, order or injunction, judgment, law,
rule or regulation to which it is a party or is subject or by which
it is bound.
(h) The Vendor has provided the Purchaser with any and all material
contracts relating to the Business.
(i) All information which has been given by or on behalf of the Vendor
to the Purchaser in the course of the negotiations for this
Agreement is to the best of the knowledge of the Directors of the
Vendor true and accurate in all respects.
(j) The Assets and the Leased Assets constitute all of the property
used in or in connection with and necessary for the continuing
conduct of the Business.
<PAGE>
10
(k) There are no disputes, claims or demands in respect of any of the
Assets which might give rise to litigation.
(l) The Vendor has met all obligations in relation to the Leased Assets.
(m) The use of the Premises for the purposes of the Business is
permitted under all relevant planning and local government statutes,
regulations and by-laws and there has been no breach of any of those
statutes, regulations or by-laws.
(n) The Vendor has performed and observed all covenants, conditions,
agreements, statutory requirements, by-laws, orders and regulations
affecting the Premises and each of them and the use of the Premises
for the Business does not contravene any of the same.
(o) There are no outstanding orders or notices affecting the Premises
and there are no proposals of any competent authority involving
compulsory acquisition or otherwise nor any other circumstances
known to the Vendor which may result in any such order or notice
being made or served.
(p) There are no facts or circumstances known to the Vendor which are
likely to result in a material industrial dispute involving the
Employees or any of them, or which may otherwise affect the
Business or its continued conduct nor are there any material pay
or other industrial claims which have been made by or on behalf of
the Employees or any of them which may affect the Business or its
continued conduct.
(q) The Vendor holds all permits and licenses required for the conduct
of the Business and there are no circumstances known to the Vendor
which will or might prevent or restrict the transfer or re-issue
(as the case requires) of those permits and licenses to the
Purchaser.
(r) There are no facts or circumstances known to the Vendor which could
or may result in the revocation or non-renewal of any of the
permits or licences required to conduct the Business.
<PAGE>
11
(s) All information which is known to the Vendor relating to the
Business which is material to be known by a purchaser of it for
value, has been disclosed to the Purchaser.
(t) The sale by the Vendor of the Business and the Assets is not
subject to any rights of first refusal, pre-emptive rights or
similar rights in favour of any person whomsoever.
10.2 VENDOR'S INDEMNITY
The Vendor must indemnify, and keep indemnified, the Purchaser against:
(a) any claim against the Purchaser to the extent that the claim arises
from or is connected with any breach of any of the warranties or of
any other term of this Agreement;
(b) any taxes which may be incurred arising from the conduct by the
Vendor of the Business prior to 1 July 1996.
10.3 PURCHASER'S WARRANTIES
The Purchaser warrants and represents to the Vendor, as an inducement to
the Vendor to enter into this Agreement and to sell the Business, and it
is condition of this agreement that, at the date of this agreement and as
at the Completion Date:
(a) the execution and delivery of the Agreement and the Employment
Agreement has been or will at Completion have been properly
authorised by all necessary corporate action of the Purchaser;
(b) the Purchaser has full corporate power and lawful authority to
execute and deliver this Agreement and to consummate and perform
or cause to be performed its obligations under this Agreement;
<PAGE>
12
(c) this Agreement constitutes the legal, valid and binding obligation
of the Purchaser enforceable in accordance with its terms by
appropriate legal remedy; and
(d) this Agreement and Completion do not conflict with or result in a
breach of or default under any provision of its memorandum and
articles of association or any material term or provision of any
agreement or deed or any writ, order or injunction, judgment, law,
rule or regulation to which it is a party or is subject or by which
it is bound.
11. RESTRAINT
11.1 RESTRAINT OBLIGATION
The Vendor must not, and must procure that each of its Associates does
not, during the period of two (2) years from 1 July 1996 in the country
of Australia:
(a) promote, participate in, operate or engage in (whether on its own
account or in partnership or by joint venture) the Business or any
business or operation similar to or otherwise in competition with
the Business; or
(b) be concerned or interested (directly or indirectly, or through any
interposed body corporate, trust, principal, agent, shareholder,
beneficiary, or as an independent contractor, consultant or in any
other capacity) in any business or operation similar to or otherwise
in competition with the Business.
11.2 REASONABLENESS OF RESTRAINT
The Vendor agrees that the restraint obligations imposed by clause 11.1
is reasonable in its extent (as to all of duration, geographical area and
restrained conduct) having regard to the interests of each party to this
Agreement.
<PAGE>
13
11.3 PURCHASER BREACH
The restraint obligations imposed by clause 11.1 will cease to
apply if the Purchaser fails to pay the Vendor any of the Purchase Price
or otherwise fails to account to the Vendor for Moneys due under this
Agreement.
11.4 TERMINATION OF EMPLOYMENT
If the employment of Mr. Graham Hanrahan under the Employment
Agreement is terminated during the Restraint Period otherwise than in a
case of misconduct or a fundamental breach by him of his terms and
conditions of employment (Faultless Termination), the restraint
obligations in clause 11.1 will cease to apply.
12. CONFIDENTIALITY
12.1 OBLIGATION
The parties must maintain absolute confidentiality concerning the
terms of this Agreement and the Employment Agreement. No public
announcements or communications relating to the terms of this
Agreement and the Employment Agreement may be made or authorised by or
on behalf of a party without the prior written approval of the other
party, except that a party may make such disclosures as it, in its
absolute discretion, believes is necessary:
(a) its professional advisers, bankers, financial advisers and
financiers upon those persons undertaking to keep confidential
any information so disclosed; or
(b) to comply with any applicable law or the requirements of any
regulatory body or the rules of any stock exchange on which the
shares of a party which is a corporation or any Associate of
such a party are listed.
12.2 SURVIVAL
The obligations in this clause 12 survive termination of this
Agreement.
<PAGE>
14
13. COSTS AND STAMP DUTY
13.1 COSTS GENERALLY
Except to the extent specified in clause 13.2 each party must bear
and is responsible for its own costs in connection with the preparation,
execution, Completion and carrying into effect of this Agreement.
13.2 STAMP DUTY
The Purchaser must pay and bear all responsibility for all stamp
duty on or in respect of this Agreement.
14. NOTICES
14.1 DELIVERY
A notice, approval, consent or other communication given or made to
a party under this agreement must be in writing and delivered prior to
5:00 pm on a Business Day, sent by certified prepaid mail or facsimile
to the address or facsimile number of the party as set out below or to
such other address or facsimile number as that party may from time to
time notify the other party for the purposes of this clause.
14.2 RECEIPT
Proof of dispatch is proof of receipt:
(a) if delivered, as at the time of delivery;
(b) in the case of a letter, on the third Business Day after
posting; and
(c) in the case of a facsimile transmission upon production of a
transmission report by the machine from which the facsimile was
sent which indicates that the facsimile was sent in its
entirety to the facsimile number of the recipient notified for
the purposes of this clause (but if the communication is not
completed by 5:00 pm on a Business Day, then at 9:00 am on the
next Business Day).
<PAGE>
15
14.3 DELIVERY BY FACSIMILE
Any notice or other communication sent by mail shall also be sent
by facsimile.
14.4 ADDRESSES FOR NOTICES
For the purposes of this clause, the address and facsimile details of
each party are as follows:
VENDOR
Attention: Mr. Graham Hanrahan
Address: Unit2, 13 Ferry Street
Hunters Hill NSW 2110
AUSTRALIA
Facsimile: (61-029 519 9399)
PURCHASER
Attention: Mark Deans
Address: Geographics, Inc.
PO Box 1750
BLAINE WA
98231
United States of America
Facsimile: (1 360 332 6352)
15. GENERAL
15.1 WHOLE AGREEMENT
This Agreement and the Schedules contain the whole agreement between
the parities and no understanding, arrangement or provision not
expressly set out in the Agreement or the Schedules will be binding
upon the parties. All correspondence, negotiations and other
communications between and parties in relation to the subject matter of
this Agreement which antedate this Agreement are superseded by and
merged in it.
<PAGE>
16
15.2 AMENDMENT
This Agreement may only be amended in writing signed by all the
parties and may not be amended in any other manner.
15.3 COUNTERPARTS AND MULTIPLE ORIGINALS
This Agreement may be executed in any number of counterparts and all
of those counterparts taken together will be deemed to constitute the
same instrument.
15.4 WAIVER
The failure by either party at any time to enforce any of its powers,
remedies or rights under this Agreement will not constitute a waiver
of such powers, remedies or rights or affect the party's rights to
enforce those powers, remedies or rights at any time. Nor does any
single or partial exercise of any power, remedy or right preclude any
other or further exercise of it or the exercise of any other power,
remedy or right under this Agreement.
15.5 SEVERANCE
If any provision of this Agreement is prohibited, invalid or
unenforceable in any jurisdiction, that provision will, as to that
jurisdiction be ineffective to the extent of the prohibition,
invalidity or unenforceability without invalidating the remaining
provisions of this Agreement or affecting the validity or
enforceability that provision in any other jurisdiction.
15.6 PROPER LAW
This Agreement is governed by the law in force in the state of
Washington, United States of America and the parties submit to the
non-exclusive jurisdiction of the courts of that State and any courts
competent to hear appeals from them.
<PAGE>
17
15.7 ATTORNEYS
Each attorney who executes this Agreement on behalf of a party declares
that the attorney has no notice of the revocation or suspension of the
power of attorney under the authority of which the attorney executes
this agreement.
15.8 ASSIGNMENT
No party may assign or transfer any of its rights or obligations under
this Agreement without the prior written consent of the other party.
15.9 MERGER
No provision of this Agreement (including, but not limited to, the
warranties made by either party):
(a) merges on or by virtue of Completion;
(b) is any way modified, discharged or prejudiced by reason of any
investigations made or information acquired by or on behalf of the
Purchaser.
15.10 FURTHER ASSURANCES
Each party must do, sign, execute and deliver and must procure that
each of its employees and agents does, signs, executes and delivers all
deeds, documents, instruments and acts reasonably required of it or
them by notice from another party effectively to carry out and to give
full effect to this Agreement and the rights and obligations of the
parties under it, both before and after Completion.
<PAGE>
18
SCHEDULE ONE
The Employees
NAME POSITION COMMENCEMENT CURRENT
DATE ENTITLEMENTS
- ------------------------------------------------------------------------------
Jennifer Medcalf Administration Services 17/1/94 $28,080.00 p.a.
Paul Lorrence Warehouse Supervisor 24/1/94 $29,068.00 p.a.
Nina Murray Company Director/ 1/7/89 $12,000.00 p.a.
Administration Services
<PAGE>
19
SCHEDULE TWO
Leased Assets
Description Lessor Term Commencing Monthly Residual
payment
- -------------------------------------------------------------------------------
Hyundai St. George 36 months March 1996 $667.34 $11,710.00
Lantra GLS Partnership
Stationwagon Banking Limited
Regn: UKQ714 Lease No. 6458365
<PAGE>
20
EXECUTED as an agreement.
THE COMMON SEAL OF GRAHAM'S [COMMON SEAL]
GRAPHICS PTY LIMITED has been affixed GRAHAM'S GRAPHICS PTY. LIMITED
to this agreement in accordance with
its articles of association in the
presence of:
/s/ Nina Murray /s/ Braham Hanrahan
- ---------------------------------- ----------------------------------
Signature of authorised person Signature of authorised person
Director Director
- ---------------------------------- ----------------------------------
Office Held Office Held
NINA MURRAY BRAHAM HANRAHAN
- ---------------------------------- ----------------------------------
Name of authorised person Name of authorised person
(block letters) (block letters)
THE COMMON SEAL of GEOGRAPHICS, INC
has been affixed to this agreement in
accordance with its Constitution and
in the presence of the appropriate
authorised officers:
- ---------------------------------- ----------------------------------
Signature of authorised person Signature of authorised person
- ---------------------------------- ----------------------------------
Office Held Office Held
- ---------------------------------- ----------------------------------
Name of authorised person Name of authorised person
(block letters) (block letters)
<PAGE>
EXHIBIT 10.9
STOCK OPTION AGREEMENT
THIS AGREEMENT is made as of the day of , 199 .
BETWEEN:
GEOGRAPHICS, INC.
(hereinafter referred to as the "Company")
OF THE FIRST PART
AND:
(hereinafter referred to as the "Optionee")
OF THE SECOND PART
WHEREAS:
A. The Optionee, is a director or employee of the Company or its
wholly-owned subsidiary, or an employee of a company providing management
services to the Company, as the case may be.
B. The Company wishes to grant the Optionee an option to purchase
common shares in the capital of the Company.
C. The Company's shares are listed and posted for trading on The
Toronto Stock Exchange.
NOW THEREFORE THIS AGREEMENT WITNESSES THAT in consideration of
the sum of $1.00 given by the Optionee to the Company, (the receipt of which
is hereby acknowledged by the Company), the parties hereto agree as follows:
1. The Company hereby grants the Optionee an option to purchase a
total of ___________ common shares in its capital (the "Option") at a price of
$_______ Cdn. per share exercisable on or before _________________ (the "Expiry
Date").
2. In order to exercise the Option, the Optionee shall, before 5 p.m.
on the Expiry Date, give notice to the Company of the Optionee's intention to
exercise the Option in whole or in part, such notice to be accompanied by
cash, bank draft, money order, or certified cheque, payable to the Company,
in the appropriate amount.
<PAGE>
-2-
3. Notwithstanding anything herein to the contrary, the exercise of
the options granted hereunder will be subject to the Optionee obtaining the
prior consent to the exercise by the directors of the Company, which consent
shall not be unreasonably withheld; it being understood that the rights
granted hereunder are granted as an incentive for future performance.
4. If the Optionee:
(a) dies prior to the expiration of the Option, the Optionee's legal
representative may, within one (1) year from the Optionee's death
and prior to the Expiry Date of the Option, exercise that portion
of the Option which remains outstanding after which time the
Option shall terminate; and
(b) ceases to act as a director or employee of the Company or its
wholly-owned subsidiary or as an employee of a Company providing
management services to the Company for any reason other than the
Optionee's death, the Option shall terminate thirty (30) days
after the date of such cessation.
5. If the issued and outstanding common shares in the capital of the
Company are at any time changed by subdivision, consolidation, re-division,
reduction in capital, reclassification or recapitalization (such changes are
herein called collectively "Capital Alterations"), not including any issuance
of additional shares for consideration, the Option shall be adjusted as
follows:
(a) The number and class of shares in respect of which the Option is
granted shall be adjusted in such a manner as to parallel the
change created by the Capital Alterations in the class and total
number of the issued and outstanding common shares; and
(b) The exercise price of each share in respect of which the Option
shall operate shall be increased or decreased proportionately,
as the case may require, so that upon exercising the Option the
same proportionate shareholdings at the same aggregate purchase
price shall be acquired after such Capital Alterations as would
have been acquired before the Capital Alterations.
6. The Option granted is personal to the Optionee and may not be
assigned or transferred in whole or in part.
<PAGE>
-3-
7. This Agreement constitutes and expresses the whole agreement of
the parties with reference to the appointment of the Optionee and with
reference to any of the matters or things herein discussed or mentioned with
reference to such appointment, all promises, representations and
understandings relative thereto being merged herein.
8. This Agreement shall be construed and enforced in accordance with
the laws of the Province of British Columbia.
9. This Agreement shall be subject to the approval of all securities
regulatory authorities having jurisdiction.
IN WITNESS WHEREOF the parties hereto executed this Agreement as
of the date first above written.
THE COMMON SEAL OF )
GEOGRAPHICS, INC. )
was hereunto affixed in the presence of: ) c/s
)
____________________________________________)
Authorized Signatory )
)
____________________________________________)
Authorized Signatory )
)
SIGNED, SEALED AND DELIVERED )
by the Optionee in the presence of: )
)
_____________________________________ ) _________________________
Name ) NAME:
)
_____________________________________ )
Address )
)
_____________________________________ )
Occupation )
<PAGE>
EXHIBIT 10.12
SUBSCRIPTION FORM
(To be executed by the registered holder to
exercise the rights to purchase Common Shares
evidenced by the within Warrant.)
The undersigned hereby irrevocably subscribes for ____________ Common
Shares pursuant to and in accordance with the terms and conditions of this
Warrant, and herewith makes payment of $____________________ therefor, and
requests that a certificate for such Common Shares be issued in the name of
the undersigned and be delivered to the undersigned at the address stated
below, and if such number of shares shall not be all of the shares
purchasable hereunder, that a new Warrant of like tenor for the balance of
the remaining Common Shares purchasable hereunder shall be delivered to the
undersigned at the address stated below.
Dated: Signed:
------------------------- -------------------------
Address:
-------------------------
-------------------------
-------------------------
<PAGE>
GEOGRAPHICS, INC.
SUBSCRIPTION PROCEDURE
Each prospective investor for the Units will be required to complete,
execute and return to the Company the following documents included with the
Confidential Private Term Sheet to the Placement Agent:
1. SUBSCRIPTION AGREEMENT: Complete all the open lines on page 1 and
complete all open lines, date and sign on page 6.
2. PURCHASER QUESTIONNAIRE: Complete, date and sign the Purchaser
Questionnaire attached to the Subscription Agreement. All items on pages i-iv
need to be completed.
3. Return the completed forms with payment in full by check of $
per Unit subscribed for ($ minimum investment, subject to adjustment
of the minimum investment at the discretion of the Company and the Placement
Agent), payable to " " The subscription amount,
Subscription Agreement and Purchaser Questionnaire should be returned to the
Placement Agent in the overnight delivery envelope provided for that purpose.
<PAGE>
SUBSCRIPTION AGREEMENT
Gentlemen:
The undersigned is writing to advise you of the following terms and
conditions under which the undersigned hereby offers to subscribe (the
"Offer") for Unit(s) of Common Stock, no par value ("Common Stock"), of
the "Company") and warrants to purchase Common Stock at an
exercise price of $ per share of Common Stock ("Warrants"). The minimum
investment will be Unit of $ (consisting of shares of Common
Stock and Warrants to purchase shares of Common Stock), subject to
reduction at the discretion of the Company and Culverwell & Co., Inc. (the
"Placement Agent"). The Company may issue up to Units in this offering
representing aggregate subscriptions of . The offering is being
conducted on a "best efforts" basis, and completion of this offering is not
subject to the purchase of a minimum number of Units by investors. All funds
received may be deposited directly to the Treasury of the Company. The
maximum offering is for $ . The Company reserves the right to increase
the amount of the offering by up to Units (representing subscriptions of
$ ) without prior authorization from subscribers in this offering.
1. SUBSCRIPTION.
Subject to the terms and conditions hereinafter set forth in this
Subscription Agreement, the undersigned hereby offers to purchase
_____________ Unit(s) for an aggregate purchase price of $__________________.
If the Offer is accepted, the Units(s) shall be paid for by the
delivery of $____________ by cash, check or money order payable to the order
of " " which is being delivered contemporaneously
herewith.
2. CONDITIONS TO OFFER.
The Offer is made subject to the following conditions: (i) that you
shall have the right to accept or reject this Offer, in whole or in part, for
any reason whatsoever; and (ii) that the undersigned agrees to comply with
the terms of this Subscription
<PAGE>
Agreement and to execute and deliver any and all further documents necessary
to become a shareholder in the Company.
The offering period for the Units is from the date of the
Confidential Term Sheet to which this Subscription Agreement is an exhibit
until (the "Termination Date"). There are Units being offered
on a "best efforts" basis. Inasmuch as there is no minimum Offer, all
proceeds will be deposited directly into the Treasury of the Company. The
Company and the Placement Agent reserve the right to increase the amount of
the offering by up to Units or extend the Termination Date
without prior authorization from subscribers in this offering.
Acceptance of this Offer shall be deemed given by the countersigning
of this Subscription Agreement on behalf of the Company.
3. REPRESENTATIONS AND WARRANTIES OF THE UNDERSIGNED.
The undersigned, in order to induce the Company and the Placement
Agent to accept this Offer, hereby warrants and represents as follows:
(A) The undersigned has sufficient liquid assets to sustain a loss
of the undersigned's entire investment.
(B) The undersigned represents that he (or she) (or it) is an
Accredited Investor as that term is defined in Regulation D promulgated under
the Securities Act of 1933, as amended (the "Act"). In general, an
"Accredited Investor" is deemed to be an institution with assets in excess of
or individuals with net worth in excess of or annual
income exceeding $ or $ jointly with their spouse.
(C) Neither the Company nor the Placement Agent has made any other
representations or warranties to the undersigned with respect to the Company
or rendered any investment advice except as contained herein or in the
Company's Confidential Term Sheet.
(D) The undersigned has not authorized any person or institution to
act as his Purchaser Representative (as that term is defined in Regulation D
of the General Rules and Regulations under the Act) in connection with this
transaction. The undersigned has such knowledge and experience in financial,
investment and business matters that he is capable of evaluating the merits
and risks of the prospective investment in the securities of the Company. The
undersigned has consulted with such independent legal counsel or other
advisers as he has deemed appropriate to assist the
<PAGE>
undersigned in evaluating his proposed investment in the Company.
(E) The undersigned represents that he (i) has adequate means of
providing for his current financial needs and possible personal
contingencies, and has no need for liquidity of investment in the
Company; (ii) can afford (a) to hold unregistered securities for an
indefinite period of time and (b) sustain a complete loss of the entire
amount of the subscription; and (iii) has not made an overall commitment
to investments which are not readily marketable which is
disproportionate so as to cause such overall commitment to become
excessive.
(F) The undersigned has been afforded the opportunity to ask
questions of, and receive answers from the officers and/or directors of
the Company acting on its behalf concerning the terms and conditions of
this transaction and to obtain any additional information, to the
extent that the Company possesses such information or can acquire it
without unreasonable effort or expense, necessary to verify the accuracy
of the information furnished; and has availed himself of such
opportunity to the extent he considers appropriate in order to permit
him to evaluate the merits and risks of an investment in the Company. It
is understood that all documents, records and books pertaining to this
investment have been made available for inspection, and that the books
and records of the Company will be available upon reasonable notice for
inspection by investors during reasonable business hours at its principal
place of business.
(G) The undersigned acknowledges that the Units have not been
registered under the Act in reliance on an exemption for transactions by
an issuer not involving a public offering and further understands that
the undersigned is purchasing the Units without being furnished any
prospectus setting forth all of the information that may be required to
be furnished under the Act if a Prospectus were required to be delivered.
(H) The undersigned further acknowledges that this offering has
not been passed upon or the merits thereof endorsed or approved by any
state or federal authorities.
(I) The Units being subscribed for are being acquired solely for
the account of the undersigned for personal investment and not with a
view to, or for resale in connection with, any distribution. By such
representation, the undersigned acknowledges and represents that no
other person has a beneficial interest in the Units subscribed for
hereunder, and that no other person has furnished or will furnish
directly or indirectly, any part of or guarantee the payment of any part
of the consideration to be paid to the
3
<PAGE>
Company in connection therewith. The undersigned does not intend to
dispose of all or any part of the Units except in compliance with the
provisions of the Act and applicable state securities laws, and
understands that the Units are being offered pursuant to a specific
exemption under the provisions of the Act, which exemption(s) depends,
among other things, upon the compliance with the provisions of the Act.
(J) The undersigned further represents and agrees that the
undersigned will not sell, transfer, pledge or otherwise dispose of or
encumber the Units except pursuant to the applicable rules and
regulations under the Act or applicable state securities laws, and
prior to any such sale, transfer, pledge, disposition or encumbrance,
the undersigned will, upon request, furnish the Company and its
transfer agent with an opinion of counsel, in form and substance
satisfactory to the Company, that registration under the Act and any
applicable state securities laws is not required.
(K) The undersigned hereby agrees that the Company may insert the
following or similar legend on the face of the certificates evidencing
shares of Common Stock and Warrants if required in compliance with the
Act or state securities laws:
"These securities have not been registered
under the Securities Act of 1933, as amended
("Act"), or any state securities laws and may
not be sold or otherwise transferred or
disposed of except pursuant to an effective
registration statement under the Act and any
applicable state securities laws, or an opinion
of counsel satisfactory to counsel to the
Company that an exemption from registration
under the act an any applicable state
securities laws is available."
The undersigned certifies that each of the foregoing
representations and warranties set forth in subsections (A) through (K)
inclusive of this Section 3 are true as of the date hereof and shall
survive such date.
4. INDEMNIFICATION.
The undersigned understands that the Units acquired as a result of
the subscription right provided in Section 1 hereof are being offered without
registration under the Act and in reliance upon the exemption for
transactions by an issuer not involving any public offering; that the
availability of such exemption is, in part, dependent upon the truthfulness
and accuracy of the representations made by the undersigned herein; that the
Company and the Placement Agent will rely on such representations in
4
<PAGE>
accepting any subscriptions for the Units and that the Company and the
Placement Agent may take such steps as they consider reasonable to verify the
accuracy and truthfulness of such representations in advance of accepting or
rejecting the undersigned's subscription. The undersigned agrees to indemnify
and hold harmless the Company and the Placement Agent against any damage,
loss, expense or cost, including reasonable attorneys' fees, sustained as a
result of any misstatement or omission on the undersigned's part.
5. NO WAIVER.
Notwithstanding any of the representations, warranties,
acknowledgements or agreements made herein by the undersigned, the
undersigned does not thereby or in any manner waive any rights granted to the
undersigned under federal or state securities laws.
6. REVOCATION.
The undersigned agrees that he shall not cancel, terminate or revoke
this Subscription Agreement or any agreement of the undersigned made
hereunder other than as set forth under Section 5 above, and that this
Subscription Agreement shall survive the death or disability of the
undersigned.
7. TERMINATION OF SUBSCRIPTION AGREEMENT.
If the Company elects to cancel this Subscription Agreement,
provided that they return to the undersigned, without interest and without
deduction, all sums paid by the undersigned, this Offer shall be null and
void and of no further force and effect, and no party shall have any rights
against any other party hereunder.
8. MISCELLANEOUS.
(A) All notices or other communications given or made hereunder
shall be in writing and shall be mailed by registered or certified mail,
return receipt requested, postage prepaid, to the undersigned at his address
set forth below, to
(B) This Subscription Agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by all parties.
(C) The provisions of this Subscription Agreement shall survive the
execution thereof.
5
<PAGE>
9. CERTIFICATION.
The undersigned certifies that he has read this entire Subscription
Agreement and that every statement on his part made and set forth herein is
true and complete.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement on the date his signature has been subscribed and sworn to below.
The Units are to be ---------------------------------------
issued in (check ONE box): Print Name of Investor
individual name ---------------------------------------
- ----- Print Name of Joint Investor
(if applicable)
joint tenants with
- ----- rights of survivorship ---------------------------------------
Signature of Investor
tenants in the entirety ---------------------------------------
- ----- Signature of Joint Investor
corporation (an officer
- ----- must sign) By:
-----------------------------------
(If an entity list name and title)
partnership (all general
- ----- partners must sign)
--------------------------------------
in the name of the Trust
- -----
Accepted as of the day
-----
of , 199
---------------------
GEOGRAPHICS, INC.
By:
-----------------------------
By:
-----------------------------
Authorized Person
6
<PAGE>
EXHIBIT 10.13
THIS WARRANT INDENTURE made as of the 4th day of February, 1997.
BETWEEN
GEOGRAPHICS, INC., a company duly incorporated pursuant
to the laws of Wyoming and having an office at 1555 Odell Road,
Blaine, Washington, U.S.A. 98231
(hereinafter called the "Company")
OF THE FIRST PART
AND:
MONTREAL TRUST COMPANY OF CANADA, a company duly incorporated
pursuant to the laws of Canada and having an office at
510 Burrard Street, Vancouver, B.C. V6C 3B9
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS:
A. The Company proposes to issue, in the aggregate, 1,403,658 warrants (the
"Warrants"):
B. The Company is duly authorized to create and issue the Warrants to be
issued as herein provided;
C. All necessary resolutions of the directors of the Company have been duly
passed and other proceedings taken and conditions complied with to make the
creation and issue of the Warrants proposed to be issued hereunder and this
Indenture and the execution thereof legal, valid and effective:
D. The Trustee has agreed to act a trustee for and on behalf of the
Warrantholders on the terms and conditions herein set forth; and
E. The foregoing recitals are made as representations of fact by the
Company and not by the Trustee.
NOW THEREFORE in consideration of the premises and of the sum of
ONE ($1.00) DOLLAR (the receipt and sufficiency whereof is hereby
acknowledged) it is agreed as follows:
<PAGE>
-2-
ARTICLE I
INTERPRETATION
1.01 In this Indenture and the Warrants (except as herein otherwise
expressly provided or unless the context otherwise requires) the following
expressions shall have the respective meanings, namely:
"AUTHORIZED NEWSPAPER" shall mean a newspaper of general circulation in any
place where notice is required to be given hereunder and customarily
published at least once a day for at least 5 days in each calendar week,
whether or not such newspaper is published on Saturdays, Sundays and legal
holidays. It shall not be necessary for any publication made more than once
in any place to be made in the same newspaper;
"BOARD OF DIRECTORS", shall mean the board of directors of the Company;
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday, a legal
holiday or a day on which banking institutions or trust companies are closed
in the City of Vancouver, in the Province of British Columbia;
"CERTIFICATE OF AUTHENTICATION" shall refer to the authentication of the
Trustee endorsed upon the Warrants pursuant to Article II;
"COMPANY" means Geographics, Inc. and its successors and permitted assigns;
"COUNSEL" means a barrister or solicitor or firm of barristers and solicitors
(who may be counsel to the Company) acceptable to the Trustee;
"DIVIDENDS PAID IN THE ORDINARY COURSE" means dividends paid on the Shares in
any fiscal year of the Company, whether in (i) cash, (ii) shares, (iii) rights,
options or warrants (other than to purchase Shares at a price per Share less
than 95% of the current market price of the Shares on the record date for
such dividend) to purchase any securities, property or other assets of the
Company, or (iv) property or other assets of the Company; provided that the
amount or value of such dividends in the aggregate (any such securities,
property or other assets so distributed to be valued at the fair market value
of such securities, property or other assets, as the case may be, as
determined by the directors, with the concurrence of the Trustee) does not in
any such fiscal year exceed the greater of:
(a) 150% of the aggregate amount or value of dividends paid by the
Company of the Shares in its immediately preceding fiscal year; and
(b) 100% of the consolidated net income of the Company (before
extraordinary items) for its immediately preceding fiscal year, as
determined in accordance with generally accepted accounting
principles;
"EXERCISE PRICE" means $4.25 per Share in lawful money of the United States
unless adjusted in accordance with the provisions of Article III, in which
case it shall mean the applicable adjusted exercise price per Share in effect
at the relative time;
"EXPIRY DATE" means May 1, 1999 or such other date as may be established
pursuant to Article III hereof;
<PAGE>
-3-
"INDENTURE" shall mean this instrument as originally executed or, if amended
or supplemented as herein provided, as so amended or supplemented;
"JOINT HOLDERS" and "JOINT REGISTERED HOLDERS" means where there is more than
one person registered as a Warrantholder, any one of such registered
Warrantholders;
"MARKET PRICE" means, for any date or specified period of trading days, the
weighted average price at which the Shares have traded on The Toronto Stock
Exchange, or such other market or exchange in which the Share are then
trading. If the Shares are not then traded on a recognized exchange or
market, the Market Price of the Shares shall be the fair market value of the
Shares as determined in good faith by the Board of Directors of the Company
after consultation with a nationally or internationally recognized investment
dealer or investment banker;
"OFFICER'S CERTIFICATE" in respect of the Company means a certificate signed
by the Chairman of the Board, the President or any Vice-President, together
with any Vice-President, the Secretary, the Treasurer, any Assistant
Secretary or Director of the Company;
"OPINION OF COUNSEL" means an opinion in writing by Counsel who shall be
satisfactory to the Trustee to which the opinion is rendered and who may be
Counsel to the Company. The acceptance by such Trustee of the Opinion of
Counsel shall be sufficient evidence that such Counsel is acceptable to such
Trustee;
"PERSON" includes any individual, corporation, body corporate, partnership,
trust, trustee, unincorporated organization, or other judicial entity, any
government agency and words importing persons have a similar meaning;
"REGISTERED HOLDER" or "HOLDER" shall mean the person or person in whose name
or names a particular warrant shall be registered on the books of the Company
kept for that purpose in accordance with the terms of this Indenture;
"SHARES" means common shares in the issued and outstanding capital of the
Company or any securities into which common shares may be exchanged,
reclassified, reorganized, or otherwise converted.
"TRUSTEE" means Montreal Trust Company of Canada or its successors as such
trustee;
"WARRANTHOLDER" and "HOLDER OF WARRANTS", or other similar terms, means any
person who is, at the time, a Registered Holder of any Warrants; and
"WARRANTS" means the warrants issued pursuant to this Indenture;
"WARRANT CERTIFICATE" or "WARRANT CERTIFICATES" means certificates issued and
representing warrants granted hereunder.
ARTICLE II
THE WARRANTS
2.01 An aggregate of 1,403,658 Warrants may be issued hereunder.
2.02 Each Warrant entitles the holder thereof to purchase prior to the
Expiry Date one (1) fully paid and non-assessable common share in the capital
of the Company, subject to the terms of this Indenture, at a subscription
price of US$4.25 per common share.
<PAGE>
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2.03 The Warrant Certificates shall be issued in registered form,
represented by certificates substantially in the form set forth as Schedule
"A" to this Indenture (which is incorporated herein by reference) and shall
bear such distinguishing letters and numbers as the Trustee may approve. The
Warrants may be typewritten, photocopies, engraved, lithographed, printed or
partly in one form and partly in another, as the Company may determine.
2.04 All Warrant Certificates issued hereunder shall be signed by the
Chairman, President and Chief Executive Officer of the Company. The
signature or signatures of all or any one or more of such officers may be
engraved, lithographed, printed or otherwise mechanically reproduced and such
signature or signatures shall be deemed for all purposes to be the signature
of such officer or officers and shall be binding upon the Company,
notwithstanding any change in any of the persons holding the said offices
between the time of actual signing and the certifying and delivery of the
said Warrant Certificates and notwithstanding that the Chairman, President
and Chief Executive Officer signing may not have held office at the date of
this Indenture or at the date of the certifying and delivery thereof.
2.05 (1) No Warrant Certificates shall be issued, or, if issued, shall be
obligatory or shall entitle the holder to the benefit of these presents or
of the trusts hereunder until it has been certified by or on behalf of the
Trustee, and such certification by the Trustee upon any such Warrant shall be
conclusive evidence that the Warrant so certified has been duly issued
hereunder and that the holder thereof is entitled to the benefit of these
presents and of the trusts under this Indenture. The certificate of the
Trustee on any Warrant Certificate shall be substantially in the form set out
in the Schedule "A" hereto or in some other form approved by the Trustee. The
certificate of the Trustee signed on the Warrant Certificates shall not be
construed as a representation or warranty by the Trustee to the validity of
this Indenture or of the said Warrants and the Trustee shall in no respect be
liable or answerable for the use made of the said Warrants or any of them or
the proceeds thereof. The certificate of the Trustee signed on the Warrants
shall, however, be a representation and warranty by the Trustee that the said
Warrants have been duly certified by the Trustee pursuant to the provisions
of this Indenture.
(2) Warrants, to the aggregate limit hereinbefore authorized,
may, forthwith upon the execution hereof or from time to time hereafter, be
issued by the Company and be certified by or on behalf of the Trustee, and be
delivered by the Trustee in accordance with and upon the written order of the
Company (evidenced by a written request signed by the Chairman, President,
and Chief Executive Officer or the Secretary of the Company) upon receipt by
the Trustee of an opinion of counsel to the effect that this Indenture has
been duly executed.
2.06 The Warrants to be issued hereunder shall be in registered form only.
The Company shall at all times cause to be kept, by and at the principal
transfer office of the Trustee in the City of Vancouver or Toronto and at
such other place or places and by the Trustee or such other registrar or
registrars, if any, as the Company, with the approval of the Trustee, may
designate, registers in any one of which shall be entered the names and post
office addresses of the holders of Warrants and particulars of the Warrants
held by them respectively and in which transfers of such Warrants shall be
registered. No transfer of a Warrant shall be valid unless made on one of
such registered by the registered holder or by his executors, administrators
other legal representatives or his or their attorney duly appointed by an
instrument in writing in form and execution satisfactory to the Trustee, and
upon compliance with such reasonable requirements as the Trustee or other
registrar may prescribe and unless such transfer shall have been duly noted
on the said Warrant by the Trustee or other registrar. The Company shall not
permit the transfer of a Warrant to be made except in compliance with all
applicable laws, including without limitation, all securities laws,
regulations, policy statements, orders, rulings and other requirements of
relevant securities regulatory authorities.
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2.07 The holder of Warrants may at any time and from time to time, upon
payment of a reasonable fee to be fixed by the Trustee, transfer the Warrants
held by them respectively from the register in which the registration of such
Warrants appears to another register maintained in another place authorized
for that purpose under the provisions of this Indenture. Such registration
shall be noted on the Warrants by the Trustee or other registrar.
2.08 The Company, with the approval of the Trustee, shall have power at any
time to close any register upon which the entries of the registration of any
Warrants appear (other than those kept in the City of Vancouver) and in that
event shall transfer the records thereof to another existing or new
register, as the case may be. In the event that the register in any place
is closed and the records transferred to a register kept in another place,
notice of such change shall be given, in the manner provided in section 2.09
hereof, to the holders of the Warrants registered in the register so closed.
2.09 (1) All notices given hereunder to the Warrantholders shall be deemed
validly given if sent by first class prepaid mail addressed to such holders
at their post office addresses appearing in the register hereinbefore
mentioned or, in the case of Joint Holders, to the registered address of one
of such Joint Holders. If the Trustee determines that mail service is or is
threatened to be interrupted at the time when the Company or Trustee is
required or elects to give any notice to holders of Warrants, such notice may
be given by means of publication in The Globe and Mail, national edition, or
any other Authorized Newspaper approved by the Trustee. Any notice so given
shall be deemed to have been given on the date it is first published.
(2) All such notices sent by post may be mailed at any place in Canada
where the Company may have established registers in accordance with the
foregoing provisions of this Indenture or partly at one of such places and
partly at another or others. Every notice so sent by post or so published
shall be deemed to have been given on the day when such notice is posted or
on the day upon which it is first published, as aforesaid, as the case may be.
2.10 The registers hereinbefore referred to shall at all reasonable times be
open for inspection by the Company, the Trustee, or any Warrantholder.
2.11 The person in whose name any Warrant shall be registered shall be deemed
and regarded as the owner thereof for all purposes of this Indenture.
2.12 (1) In the case that any of the Warrant Certificates shall become
mutilated or be lost, stolen or destroyed, the Company in its discretion may
issue and thereupon the Trustee, subject to the conditions contained in this
section 2.12, shall certify and deliver, a new Warrant Certificate of like
date and tenor as the one mutilated, lost, stolen or destroyed, in exchange
for and in place of and upon cancellation of the mutilated Warrant
Certificate or in lieu of an in substantiation for the same, if lost, stolen
or destroyed and the substituted instrument shall be in a form approved by
the Trustee.
(2) In the case of loss, theft or destruction, the applicant for a
substituted Warrant Certificate shall, as a condition precedent to the issue
thereof, furnish to the Company and the Trustee such evidence of ownership
and of the loss, theft or destruction of such instrument so lost, stolen or
destroyed as shall be satisfactory to the Company and to the Trustee in their
discretion and such applicant shall also furnish an indemnity in an amount
and form satisfactory to the Company and the Trustee in their discretion and
shall pay the expenses which may be incurred by them and their reasonable
charges in the premises.
2.13 (1) Except as herein otherwise provided, in every case of exchange of
Warrant Certificates of any denomination or form for other Warrant
Certificates, and for any registration of Warrants, and for any transfer of
Warrants, the Trustee or other registrar may make a sufficient
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charge to reimburse it for any stamp taxes or governmental charge required to
be paid and a reasonable charge for its services and, in addition, may charge
a reasonable charge per Warrant issued upon such exchange, registration or
transfer as a condition precedent thereof.
(2) Warrant Certificates of any denomination may be exchanged for
Warrant Certificates of any other authorized denomination or denominations,
any such exchange to be for an equivalent number of Warrants. All exchanges
of Warrants shall be made at the principal transfer office of the Trustee in
the City of Vancouver or at the office or offices of such other registrar or
registrars, if any, or at such other office or offices of the Trustee, if
any, as may from time to time be designated by the Company, with the approval
of the Trustee, for such purpose.
2.14 Every registrar (including the Trustee) shall, when requested to do so
by the Company or by the Trustee, furnish the Company or the Trustee with a
list of the names and addresses of holders of Warrants.
21.5 The Warrant Certificates shall be numbered in such manner as the
Company, with the approval of the Trustee, may determine.
ARTICLE III
EXERCISE AND REDEMPTION OF WARRANTS
3.01 (1) The holder of a Warrant may exercise the right thereby conferred
on such holder to subscribe for Shares by surrendering the Warrant Certificate
representing same, on or prior to the time of Expiry, to the Trustee at its
principal office in the City of Vancouver, British Columbia or at any other
place designated by the Company, with the approval of the Trustee, and notice
of which has been given to the holders of Warrants, together with (a) the
Warrant Certificate with a duly completed and executed Warrant Exercise
Notice substantially in the applicable form set out in Schedule "A" and (b) a
certified cheque, money order or bank draft in lawful money of Canada payable
to or to the order of the Company, at par in the city where such Warrant
Certificate is surrendered for exercise in an amount equal to the Exercise
Price multiplied by the number of shares subscribed for.
(2) The Warrant Exercise Notice referred to in subsection 3.1(1) shall
be signed by the Warrantholder (and, where Shares to be issued are to be
registered in a name other than that of the registered holder of the
Warrants, with the signature guaranteed by a Canadian chartered bank or trust
company, or a recognized member of a Canadian or United States stock exchange
or a member of the Transfer Association Medallion (Stamp) Program) and shall
specify the number of Shares which the holder desires to subscribe for (being
not more than those which the holder is entitled to subscribe for pursuant to
each Warrant Certificate surrendered), the person or persons in whose name or
names such Shares to be issued, the address or addresses of such person or
persons and the number of Shares to be issued to each such person if more than
one is so specified. If any of the Shares subscribe for are to be issued to a
person or persons other than the Warrantholder, the Warrantholder shall pay
to the Trustee or to the registrar and transfer agent for the Shares, as the
case may be, all applicable stamp, issue, registration, transfer or other
similar taxes and duties and the Company shall not be required to issue or
deliver certificates evidencing Shares unless or until such Warrantholder
shall have paid the amount of any such taxes and duties or shall have
established to the satisfaction of the Company that such taxes and duties
have been paid or that no taxes or duties are due, and the Warrantholder
shall have complied with all other reasonable requirements of the Trustee.
3.2 (1) Upon compliance by the holder of any Warrant with the provisions
of subsections 3.1(1) and (2), the number of Shares subscribed for shall be
deemed to have been issued and the
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person or persons to whom such Shares are to be issued shall be deemed to
have become the holder or holders of record of such Shares on the Exercise
Date unless the transfer books of the Company shall be closed on such date,
in which case the Shares subscribed for shall be deemed to have been issued,
and such person or persons shall be deemed to have become the holder or
holders of record of such Shares, on the date on which such transfer books
were reopened, but such Shares shall be issued at the Exercise Price in
effect on the Exercise Date.
(2) When the registers of the Company have been open for three (3)
Business Days after the due exercise of any Warrant as aforesaid, the Company
shall forthwith (i) cause to be mailed to the person or persons in whose name
or names the Shares so subscribed for are to be issued, as specified in the
Warrant Exercise Notice, to the address(es) specified in such Warrant
Exercise Notice or (ii) if so specified in such Warrant Exercise Notice,
cause to be delivered to such person or persons at the office of the Trustee
where the Warrant Certificate(s) were surrendered, a share certificate or
certificates for the appropriate number of Shares which the Warrantholder is
entitled to and has elected to subscribe for pursuant to the Warrant
Certificate(s) surrendered.
3.3 (1) A Warrantholder may subscribe for a number of Shares less than the
number which the holder is entitled to subscribed for pursuant to the
surrendered Warrant Certificate, provided that in no event shall fractional
Shares be issued with regard to Warrants exercised. In such event, such
holder upon exercise thereof shall receive a new Warrant Certificate
(complying with subsection 2.03 in respect of the balance of the Shares which
such holder was entitled to but did not subscribe for.
(2) Notwithstanding any adjustment provided for in Section 3.7 or
otherwise, the Company shall not be required, upon the exercise of any
Warrant, to issue fractions of shares or to distribute certificates which
evidence fractional Shares. In lieu of fractional Shares, each registered
holder of a Warrant Certificate as of the effect date or record date of the
event giving rise to the adjustment and representing an entitlement to
subscribe for a fractional number of Shares as a result of an adjustment
provided for in Section 3.7 shall be entitled to round up his or her
subscription to the next highest whole number of shares at the prevailing
Exercise Price per Share.
3.4 Subscriptions for Shares upon the exercise of Warrants will not be
accepted from any person or agent of a person who is or appears to be, or who
the company or the Trustee has reason to believe, is a resident of any
jurisdiction other than a Canadian or United States jurisdiction unless the
Shares may lawfully be sold in such other jurisdiction and to such person at
the time. In addition, the Warrant Certificates and the Warrants evidenced
thereby may not be assigned, transferred or otherwise conveyed to any person
or agent of a person who appears to be, or who the assignor has reason to
believe is, a resident of such non-Canadian and non-United States
jurisdiction unless the Warrants and the Shares issuable upon exercise of the
Warrants may lawfully be sold in such other jurisdiction and to such person
at the time.
3.5 After the applicable Time of Expiry, all rights under any Warrant which
has not theretofor been exercised in accordance with the terms hereof and
thereof, shall wholly cease and terminate and such Warrant shall by void and
of no effect.
3.6 All Warrant Certificates surrendered to the Trustee pursuant to Sections
2.13, 3.3, 3.4, 3.1 or 3.2 shall be cancelled by the Trustee and retained
for safekeeping until a date which is six years following the applicable
Time of Expiry, following which date Warrant Certificates so held may be
destroyed unless the Company directs otherwise, provided that the Trustee
shall furnish the company with a destruction certificate identifying the
Warrant Certificates so destroyed and the number of Warrants represented
thereby.
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3.7 Subject to subsection 3.7(2), the Exercise Price per Share, and the
number of shares which may be subscribed for upon exercise of the Warrants
shall each be subject to adjustment from time to time in the events and in
the manner provided as follows:
(1) If and whenever at any time prior to the Time of Expiry, the
Company shall:
(a) declare a dividend or make a distribution on its Shares payable in
shares, other than a dividend paid in the ordinary course, or
(b) subdivide its outstanding Shares into a greater number, or
(c) consolidate its outstanding Shares into a smaller number
(any of such events in these clauses (a), (b) and (c) being called a "Share
Reorganization") then, effective immediately after the record date at which
the holders of Shares are determined for the purposes of the Share
Reorganization, the Exercise Price per Share shall be adjusted by multiplying
the applicable Exercise Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Shares
outstanding on such record date before giving effect to such Share
Reorganization and the denominator of which shall be the number of Shares
outstanding immediately after giving effect to such Share Reorganization.
(2) If and whenever, at any time prior to the Time of Expiry, the
company shall fix a record date for the issuing of rights, options or
warrants to all or substantially all of the holders of the Shares entitling
them for a period expiring not more than forty-five (45) days after such
record date (the "Rights Period") to subscribe for Shares (or securities
convertible into or exchangeable for Shares) at a price per share (or having
a conversion or exchange price per share) which is less than 95% of the
Market Price per share on the record date for such issue (any of such
events being called a "Rights Offering"), then, effective immediately after
the end of the rights Period, the Exercise Price per Share shall be
adjusted to a price determined by multiplying the applicable Exercise Price
in effect immediately prior to the end of the Rights Period by a fraction:
(a) the numerator of which shall be the sum of:
(i) the number of Shares outstanding as of the record date for
the rights Offering, and
(ii) a number determined by dividing (1) either (a) the product of
the number of Shares issued or subscribed during the Rights
Period upon exercise of the rights, warrants, or options under
the Rights Offering and the price at which such Shares are
offered, or, as the case may be, (b) the product of the
exchange or conversion price of the convertible or
exchangeable securities so offered and the number of Shares
for or into which the convertible or exchangeable securities
issued or subscribed during the Rights Period upon the exercise
of the rights, warrants or options are convertible or
exchangeable, by (2) the Market Price per Share as of the
record date for the Rights Offering, and
(b) the denominator of which shall be the number of shares outstanding
(including the number of Shares actually issued or subscribed for
during the Rights Period upon exercise of the rights, warrants or
options under the Rights Offering) or which would be outstanding
upon the conversion or exchange of all convertible or exchangeable
securities issued or subscribed during the Rights Period upon
exercise of the rights, warrants or options under the rights
Offering, as applicable, in each case after giving effect to the
Rights Offering.
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Shares owned by or held (otherwise than as security) for the account of
the Company or any Subsidiary of the Company shall be deemed not to be
outstanding of the purpose of any such computation. In order to give effect
to the provisions of subsection 3.7(5) in the circumstances described below,
any holder of Warrants who shall have exercised his right to purchase Shares
in accordance with subsection 3.4(1) during the period beginning immediately
after the record date for a Rights Offering and ending on the last day of the
Rights Period therefor shall, in addition to the Shares, as applicable, to
which he or she is otherwise entitled upon such exercise in accordance with
subsection 3.1(1), be entitled to that number of additional Shares equal to
the result obtained when difference, if any, between the Exercise Price per
Share in effect immediately prior to the end of such Rights Offering and the
Exercise Price per Share as adjusted for such Rights Offering pursuant to
subsection 3.7(2), is multiplied by the number of Shares purchased upon the
exercise of the Warrants held by such Warrantholder during such period, and
the resulting product is divided by the Exercise Price per Share as adjusted
for such Rights Offering pursuant to this subsection 3.7(2); provided that
the provisions of subsection 3.3(2) shall be applicable, MUTATIS MUTANDIS, to
any fractional interest in a Share to which such Warrantholder might
otherwise be entitled under the foregoing provisions of this subsection
3.7(2). Such additional Shares (excluding any additional Shares purchasable
by virtue of the operation of subsection 3.7(2)) shall be deemed to have been
issued to the Warrantholder immediately following the end of the Rights
Period and a certificate for such additional Shares shall be delivered to
such Warrantholder within ten (10) Business Days following the end of the
Rights Period.
(3) If and whenever at any time prior to the time of Expiry the
company shall fix a record date for the payment, issue or the distribution to
all or substantially all of the holders of the Shares of (i) a dividend, (ii)
cash or assets (including evidences of the Company's indebtedness), or (iii)
rights or other securities (including without limitation securities
convertible into or exchangeable for Shares), if such issue or distribution
does not constitute a dividend paid in the ordinary course, a Share
Reorganization of a Rights Offering (any or such non-excluded events being
herein called a "Special Distribution"), the Exercise Price pre Share shall
be adjusted effective immediately after such record date to a price
determined by multiplying the applicable Exercise Price in effect on such
record date by a fraction:
(a) the numerator of which shall be:
(i) the product of the number of shares outstanding on such record
ate and the Market Price per Share on such record date; less
(ii) the fair market value, as determined by action of the directors
(whose determination shall be conclusive), to the holders of the
Shares of such dividend, cash, assets, rights or securities so
paid, issued or distributed, and
(b) the denominator of which shall be the number of Shares outstanding on
such record date multiplied by the Market Price per Share on such
record date.
Any Shares owned by or held (otherwise than as security) for the account of
the company or any Subsidiary of the Company shall be deemed not to be
outstanding the purpose of any such computation.
(4) If and whenever, at any time prior to the time of Expiry, there
shall be a reclassification of Shares outstanding at such time or change of
the Shares into other shares or into other securities (other than a Shares
Reorganization), or a consolidation, amalgamation, arrangement or merger of
the Company with or into any other corporation or other entity (other than a
consolidation, amalgamation, arrangement or merger which does not result in
any
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reclassification of the outstanding shares or a change of the Shares into
other shares), or any sale, transfer, lease or conveyance of the undertaking
or assets of the Company as an entirety or substantially as an entirety to
another corporation or entity (any of such events being herein called a
"Capital Reorganization"), any Warrantholder who exercises his or her right
to subscribe for and purchase Shares pursuant to the exercise of Warrant(s)
then held after the effective date of such Capital Reorganization shall be
entitled to receive, and shall accept for the same aggregate consideration in
lieu of the number of shares to which such holder was thereto fore entitled
upon such exercise the aggregate number of shares, other securities or other
property which such holder would have been entitled to receive as a result of
such Capital Reorganization if, on the effective date thereof, the
Warrantholder had been the registered holder of the number of Share to which
such holder was theretofor entitled to subscribe for and purchase upon
exercise of such Warrants. If determined appropriate by the directors in
their sole discretion, acting reasonably, and subject to the prior written
consent of the TSE, appropriate adjustments shall be made as a resell of any
such Capital Reorganization in the application of the provisions set forth in
this Article III with respect to the rights and interest thereafter of
holders of Warrants to the end that the provision set forth in this Article
III shall thereafter correspondingly be made applicable as nearly as may
reasonably be in relation to any shares, other securities or other property
thereafter deliverable upon the exercise of any Warrant. Any such adjustment
shall be made by and set forth in an Indenture supplemental hereto approved
by action by the directors and entered into pursuant to the provisions of
Article VI and shall for all purpose be conclusively deemed to be an
appropriate adjustment.
(5) If and whenever any time prior to the Time of Expiry there shall
occur a Capital Reorganization, a Rights Offering or a Special Distribution
and any such event results in an adjustment of the Exercise price per Share
pursuant to the provisions of this Section 3.7, the number of shares issuable
upon exercise of each Warrant (at the Exercise Price per Share) shall each be
adjusted contemporaneously with the adjustment of the Exercise Price by
multiplying the number of Shares theretofor purchasable on the exercise
thereof by a fraction, the numerator of which shall be the applicable
Exercise Price in effect immediately prior to such adjustment and the
denominator of which shall be applicable Exercise Price resulting from such
adjustment.
3.8 for the purposes of Section 3.7 hereof:
(1) Any adjustment pursuant to Section 3.7 shall be cumulative and
made successively whenever an event referred to therein shall occur, subject
to the following provisions:
(a) all calculations under Section 3.7 shall be made to the nearest
1/100th of a Share:
(b) no adjustment to an Exercise Price per share shall be required
unless such adjustment would result in a change of at least 1% in
the prevailing Exercise Price per Share and no adjustment shall be
made in the number of share which may be subscribed for upon
exercise of a Warrant unless it would require a change of at
least one one-hundredth (1/100th) of a Share, provided, however,
that any adjustment which, except for the provisions of this
subsection 3.8(1)(b) would otherwise have been required to be made,
shall be carried forward and taken into account in any subsequent
adjustment and provided further, that in no event shall the Company
be obligated to issue fractional Shares or fractional interest in
Shares upon exercise of Warrants;
(c) no adjustment to an Exercise Price per Share or in the number of
shares which may be subscribed for upon exercise shall be made in
respect of any event described in subsection 3.7(2) if holders of
Warrants are entitled to participate in such event on the same
terms MUTATIS MUTANDIS as if such Warrantholders had exercised
their Warrants prior to or on the effective date or record date of
such event, any such
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participation by holders of Warrants being subject to the prior
written consent of the TSE;
(d) if a dispute shall at any time arise with respect to adjustments
to the Exercise Price per Share or the number of shares
purchasable pursuant to the subscription rights represented by the
Warrants, such disputes shall be conclusively determined by the
Company's auditors or, if they are unable or unwilling to act,
by such other firm of independent chartered accountants as may
be selected by action by the directors and any such determination
shall be conclusive evidence of the correctness of any adjustments
made under Section 3.7 and shall be binding upon the Company,
subject to the prior written consent of the TSE;
(e) if the Company shall set a record date to determine the holders
of its Shares for the purpose of entitling them to receive any
dividend or distribution or any subscription or purchase rights,
options or warrants and shall, thereafter and before the
distribution to such Shareholders of any such dividend,
distribution or subscription or purchase rights, legally
abandon its plan to pay or deliver such dividend, distribution or
subscription or purchase rights, then no adjustment in the
Exercise Price per Share or the number of Shares purchasable
upon exercise of any Warrant shall be required by reason of the
setting of such record date;
(f) in any case in which Section 3.7 shall require than an
adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence
of such event issuing to the holder of any Warrant exercised
after such record date and before the occurrence of such event
the additional Shares issuable upon such exercise by reason of
the adjustment required by such event over and above the shares
issuable upon such exercise before giving effect to such
adjustment; provided, however, that the Company shall deliver to
such holder an appropriate instrument evidencing such holder's
right to receive such additional Shares (and the right to receive
any dividends or other distributions which, but for the provisions
of this clause, such holder would have been entitled to receive
in respect of such additional Shares from and after the Exercise
Date of such Warrant) upon the occurrence of the event requiring
such adjustment;
(g) in the event that the price per Share of a Rights Offering is
not expressed in United States funds, the Trustee shall convert
the price per Share of the Rights Offering to United States funds
on the basis of the spot rate of exchange quoted at the close of
business on the Business Day immediately preceding the relevant
date by the United States Bank for the purpose of determining
whether such price per Share of the Rights Offering is less than
95% of the Market Price per Share; and
(h) in the absence of a resolution of the directors fixing a record
date for a Rights Offering or Special Distribution, the Company
shall be deemed to have fixed as the record date therefor the
date on which the Rights Offering or Special Distribution is
effected.
3.9 As a condition precedent to the taking of any action which would require
an adjustment pursuant to Section 3.7, the Company shall take any action
which may, in the opinion of counsel, be necessary in order that the Company
have unissued and reserved in its authorized capital and may validly and
legally issue as fully paid and non-assessable all the Shares (or other
securities as applicable) which the holders of Warrants are entitled to
received on the full exercise thereof in accordance with the provisions
hereof, subject to the prior written consent of the TSE.
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3.10 (1) At least fourteen (14) days prior to the effective date or
record date, as the case may be, of any event which requires or might
require adjustment in any of the subscription rights pursuant to any of the
Warrants, including the applicable Exercise Price per Share and the number
of Shares which are purchasable upon the exercise thereof, the Company shall:
(a) file with the Trustee a certificate of the Company specifying
the particulars of such event and, if determinable, the required
adjustment and the computation of such adjustment; and
(b) give written notice to the Warrantholders of the particulars of
such event and, if determinable, the required adjustment, in the
manner provided in Section 7.04.
(2) In the case of any event notice of which is required pursuant to
subsection 3.10(1) but in respect of which the required adjustment is not
determinable at the time of such notice, the Company shall promptly after
such adjustment is determinable:
(a) file with the Trustee a computation of such adjustment;
(b) give written notice to the Warrantholders of such adjustment in
the manner provided in Section 2.09
(3) The Trustee shall be entitled to rely conclusively on the
certificates of the Company filed pursuant to this Section 3.10, as to
the contents thereof.
3.11 The Trustee (i) shall not, at any time, be under any duty or
responsibility to any Warrantholder to determine whether any fact exist which
may require any adjustment contemplated by Section 3.7, or to verify the
nature or extent of any such adjustment when made, or the method employed in
making the same; and (ii) shall not be accountable with respect to the
validity or value (or the kind or amount) of any Shares or of any other
securities or properties which may at any time be issued or delivered upon
the exercise of the subscription right attaching to any Warrants.
ARTICLE IV
COVENANTS
4.01 The Company will furnish or cause to be furnished to the Trustee or its
duly authorized agent or attorney such information relating to its business
as the Trustee may reasonably require for the purposes of enabling the
Trustee to carry out its duties under this Indenture.
4.02 The Company will comply with all applicable laws, statutes, orders,
rules, regulations, notices or policies of all governmental authorities if the
failure to comply therewith might reasonably be expected to adversely affect
its financial condition or its ability to carry on any of its business.
4.03 The Company will at all times indemnify and save harmless the Trustee
from all loss, costs, charges, damages and expenses borne by the Trustee in
performing its duties hereunder or which may be claimed against the Trustee
in relation thereto and it will pay the fees, charges and expenses of the
Trustee and its agents and representatives in relation to the performance by
the Trustee of all it duties hereunder and in relation to the registration
of this Indenture in all offices of record where the recording thereof is
necessary for the protection of the security constituted hereby and the issue
of the Warrants, and without limiting the generality of the foregoing, the
Company will pay all costs, charges and expenses incurred by the Trustee
and its agents and representatives of or incidental to the preparation and
filing of any discharge, amendment, financing change
<PAGE>
statement or similar document from time to time for purpose of amending or
discharging in whole or in part the changes created hereby or any
registration in respect thereof.
4.04 Whenever necessary to avoid or fill a vacancy in the office of the
Trustee, to appoint a Trustee, so that there shall at all times be a Trustee
hereunder.
ARTICLE V
ADMINISTRATION OF THE TRUST AND PROTECTION OF THE TRUSTEE
5.01 By way of supplement to the provisions of any Act of any of the
Provinces of Canada for the time being relating to trustees, and in addition
to any other provision of this Indenture for the relief of the Trustee, it is
expressly declared that:
(a) the Trustee may, in relation to these presents, act on the
opinion or advice of or information obtained from any lawyer,
valuer, auditor, broker, auctioneer or other expert, whether
obtained by the Trustee or by the Company or otherwise, but
shall not be bound to act to act upon such opinion or advice
and shall not be responsible for any loss occasioned by so
acting or not acting as the case may be, and may employ such
assistance as may be necessary to the proper discharge of its
duties and may pay proper and reasonable compensation for all
such legal and other advice or assistance as aforesaid;
(b) any such advice or opinion or information may be sent or
obtained by letter, telegram, radio, cablegram, telecopier and
telex and that the Trustee shall not be liable for acting on
any advice, opinion or information purporting to be conveyed
by any such means, although the same shall contain some error
or shall not be authentic;
(c) the Trustee shall be at liberty to accept an Officer's
Certificate as sufficient evidence of the facts stated in such
certificate and the Trustee shall be in no way bound to call
for further evidence or be responsible for any loss that may
be occasioned by its failing to do so;
(d) the Trustee shall only be accountable for reasonable
diligence in the management of the trusts hereof and shall
only be liable for its own willful acts and defaults and shall
not be liable for any act or default on the part of any agent
or co-trustee or for having permitted any agent or co-trustee
to receive and retain any monies payable to the Trustee
hereunder;
(e) the Trustee shall not be responsible for any misconduct on
the part of any person appointed by it hereunder, or bound to
supervise the proceedings of any such appointee;
(f) the Trustee shall not, except as otherwise expressly
provided herein, be bound to give notice to any person or
persons of the execution hereof nor in any way interfere with
the conduct of the Company's business;
(g) the Trustee, except as herein otherwise provided, shall, as
regards all the trusts, powers, authorities and discretion
vested in it, have absolute and uncontrolled discretion as to
the exercise thereof and, in the absence of fraud, it shall
not be responsible for any loss, costs, damage or
inconvenience that may result from the exercise or non-exercise
thereof;
13
<PAGE>
(h) the Trustee shall not be liable for or by reason of the
statements or implications of fact or law contained in or
arising out of anything contained in this Indenture or in
the Warrants or be required to verify the same or to keep
itself informed or advised as to the payment by the Company
of any taxes or assessments or premiums or insurance or other
payments to be made, it being hereby agreed and declared that,
as to all matters and things in this clause referred to, the
duty and responsibility shall rest upon the Company and not
upon the Trustee and the failure of the Company to discharge
such duty and responsibility shall not in any way render the
Trustee liable or cast upon it any duty or responsibility for
the breach of which it would be liable;
(i) the Trustee will be paid such reasonable remuneration for
its services as Trustee as may be agreed upon between the
Trustee and the Company and will also be paid all costs,
charges and expenses properly incurred by the Trustee in
connection with the trusts hereof and the Company (in addition
to any right of indemnity by law given to the Trustee) will
also at all times keeps indemnified the Trustee against all
actions, proceedings, costs, claims and demands in respect of
any matter or thing done or omitted by it in any way relating
to these presents other that such actions, proceedings, costs,
claims or demands arising from a breach by the Trustee of its
obligations hereunder. The said remuneration shall be payable
notwithstanding that a liquidator, receiver or receiver and
manager or trustee under the BANKRUPTCY ACT shall have been
appointed or the trusts of this Indenture shall be in course of
administration by or under the direction of the court;
All costs, charges and expenses incurred and all payments
made by the Trustee in the lawful exercise of the powers hereby
conferred upon it, including all remuneration payable to the
Trustee, shall be payable by the Company on demand and all such
costs, charges and expenses and payments and all remuneration
payable to the Trustee hereunder, shall be payable out of any
funds coming into the possession of the Trustee in priority to
the Warrants;
(j) the Trustee may employ such agents and other assistants as it
may reasonably require for the proper discharge of its duties
hereunder and shall not be responsible for any misconduct on
the part of any such agents and other assistants or person
appointed by it hereunder or be bound to supervise the
proceedings of any such appointees, and may pay reasonable
remuneration for all services performed for it in the discharge
of the trusts hereof and compensation for all disbursements,
costs and expenses in relation thereto shall be payable on
demand;
(k) the Trustee shall not be bound to act as herein provided in
accordance with any direction or request of the Company or of
their respective Boards of Directors until a duly certified
copy of the instrument or resolution containing such direction
or request shall have been delivered to the Trustee;
(l) the Company hereby irrevocably appoints the Trustee to be
the attorney of the Company and in the name and on behalf of
the Company to execute and do any assurances and things which
the Company ought to execute and do under the name of the
Company in the exercise of all or any of the powers hereby
conferred on the Trustee;
(m) the Trustee may act hereunder by such officers or other
persons as it may, from time to time, designate for that
purpose;
14
<PAGE>
- 15 -
(n) the Trustee shall have the right to resign upon 60 days notice to
the Company and the Warrantholders.
ARTICLE VI
SUPPLEMENTAL INDENTURES
6.01 (1) From time to time, the Company and the Trustee may, when
authorized by a resolution of the Directors and, subject to the provisions of
this Indenture, they shall, when so directed by this Indenture, execute,
acknowledge and deliver, by their respective proper officers, deeds of
Indentures supplemental hereto, which thereafter shall form part hereof, for
any one or more of the following purposes:
(a) adding to the limitations or restrictions herein specified further
limitations or restrictions thereafter to be observed; provided
that the Trustee shall be of the opinion that such further
limitations or restrictions shall not be prejudicial to the
interests of the Warrantholders;
(b) adding to the covenants of the Company herein contained for the
protection of the holders of the Warrants and/or providing for
events of default in addition to those herein specified;
(c) making such provisions not inconsistent with this Indenture as may
be necessary or desirable with respect to matters or questions
arising hereunder, including the making of any modifications in
the form of the Warrants which do not affect the substance thereof
and which, in the opinion of the Trustee, it may be expedient to
make; provided that the Trustee shall be of the opinion that such
provisions and modifications will not be prejudicial to the
interests of the Warrantholders.
(d) making any additions to, deletions from or alterations of the
provisions of this Indenture which in the opinion of Counsel may
from time to time be necessary or advisable.
(e) evidencing the succession, or successive successions, of other
corporations to the Company and to the covenants of and
obligations assumed by any such successor in accordance with the
provisions of this Indenture.
(f) setting forth any adjustment of the Exercise Price of Warrants in
accordance with section 3.7 and resulting from any action referred
to in section 3.7 hereof; and
(g) for any other purpose not inconsistent with the terms of this
Indenture.
(2) The Trustee may also, without the consent or concurrence of
the Warrantholders, by supplemental indenture or otherwise concur with
the Company in making any changes or corrections in this Indenture as to
which it shall have been advised by Counsel are corrections of changes
or as to which it shall have been advised by Counsel are required for the
purpose of curing or correcting any ambiguity or defective or
inconsistent provision or clerical omission or mistake or manifest error
contained herein or in any deed or indenture supplemental or ancillary
hereto.
<PAGE>
- 16 -
ARTICLE VII
MISCELLANEOUS
7.01 All the covenants, stipulations, promises and agreements in the
Indenture contained by or on behalf of the Company shall bind its successors
and assigns, whether so expressed or not.
7.02 Any act or proceeding by any provisions of this Indenture authorized or
required to be done or performed by any board, committee or officer of the
Company shall and may be done and performed with like force and effect by the
like board, committee or officer or any corporation that shall, at that time,
be the successor of the Company.
7.03 The Company, by instrument in writing duly executed by it and delivered
to the Trustee, may surrender any of the powers or rights reserved to the
Company and thereupon such power or right to surrender shall terminate both
as to the Company and as to any successor corporation.
7.04 Any notice or demand which by any provision of this Indenture is
required or permitted to be given or served by the Trustee or by the Holders
of Warrants to or on the Company may be given or served by personal delivery,
or by prepaid registered mail, or by telegram, telex or telecopier addressed
as first before written. Any notice, direction, request or demand by any
Warrantholder to or upon the Trustee may be given or served by personal
delivery or by prepaid registered mail, or by telegram, telex or telecopier
addressed as aforesaid.
Any notice, direction, request or demand by the Company or by the Trustee to
or upon a Warrantholder shall be deemed to have been sufficiently given or
made for all purposes if such notice has been delivered personally, or mailed
by prepaid registered mail, or telegram or telecopied to the last known
address of the Warrantholder on the books of the Company and the Trustee.
Whenever by any provision of this Indenture, any notice, direction, request
or demand is required or permitted to be given or made upon the Trustee, such
notice, direction, request or demand shall be given or made to the Trustee as
in this section 7.04 provided.
Any party may change its address for service by giving notice hereunder,
except that in the case of Warrantholders, notice of change of address need
only be given to the Company and the Trustee.
Notice shall be deemed to have been received by the parties to whom they were
addressed on the day of delivery, if delivered personally, on the fifth day
after the mailing thereof (and there is at the time no postal interruption),
and on the business day next following the telegram or telecopying thereof.
7.05 This Indenture shall be governed by the laws of British Columbia.
<PAGE>
-17-
7.06 This Indenture may be executed in any number of counterparts, each of
which shall be original; but such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed these presents under
their respective seals and the hands of their proper officers in that behalf.
GEOGRAPHICS, INC.
/s/ Ronald S. Deans C/S
- ------------------------
Name: Ronald S. Deans
Title: President
MONTREAL TRUST COMPANY OF CANADA
/s/ J Karim C/S
- ------------------------
Name: JENNY KARIM
Title: A/C Manager
<PAGE>
EXHIBIT 10.14
CTS - W-1
WARRANT TO PURCHASE
COMMON STOCK
OF
-----------------
This is to certify that (the "Holder") is entitled,
subject to the terms and conditions hereinafter set forth, to purchase
( ) shares of Common Stock, par value $ per share (the "Common
Shares"), of , a Wyoming corporation (the "Company"),
from the Company at the price per share and on the terms set forth herein and
to receive a certificate for the Common Shares so purchased on presentation
and surrender to the Company with the subscription form attached, duly
executed and accompanied by payment of the purchase price of each share
purchased either in cash or by certified or bank cashier's check or other
check payable to the order of the Company.
EXERCISE
The purchase rights represented by this Warrant are exercisable at a
price per Common Share of $ at any time on or prior to
subject to adjustment as hereinafter provided.
The purchase rights represented by this Warrant are exercisable at the
option of the registered owner hereof in whole or in part, from time to time,
within the period specified; provided, however, that such purchase rights
shall not be exercisable with respect to a fraction of a Common Share. In
case of the purchase of less than all the Common Shares purchasable under
this Warrant, the Company shall cancel this Warrant on surrender hereof and
shall execute and deliver a new Warrant of like tenor and date for the
balance of the shares purchasable hereunder.
The Company agrees at all times to take appropriate action to reserve or
hold available a sufficient number of Common Shares to cover the number of
shares issuable on exercise of this and all other Warrants of like tenor then
outstanding. The Company agrees to obtain any authorization required from its
shareholders in order to amend its Articles of Incorporation to increase the
authorized capitalization to permit the exercise of this Warrant and other
Warrants of like tenor.
REDEMPTION OF WARRANT
Commencing , the Company shall have the right on 20
days' prior written notice to redeem, at a price of $ per underlying
Common Share, all of the Warrants included in the
<PAGE>
Company's private offering of Units of its securities of which this Warrant
is a part, provided the closing price of the Company's Common Stock has
exceeded $ per share for 10 consecutive trading days concluding within
any 20 consecutive trading day period immediately prior to date the Company
has provided notice of such redemption, and provided further that the Company
has in effect a current registration statement covering the resale of the
Common Shares and this Warrant under the Securities Act of 1933 in order to
permit the sale of the Common Shares and this Warrant.
NO VOTING RIGHTS
This Warrant shall not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Company, or to any other rights whatever
except the rights herein expressed, and no dividends shall be payable or
accrue in respect of this Warrant or the interest represented hereby or the
Common Shares purchasable hereunder until or unless, and except to the extent
that, this Warrant shall be exercised.
ADJUSTMENTS
The number of shares of Common Stock purchasable upon exercise of this
Warrant and the Purchase Price shall be subject to adjustments from time to
time as follows:
If the Company shall at any time prior to the expiration of this Warrant
subdivide its Common Stock, by forward or reverse stock split or otherwise,
combine its Common Stock or issue additional shares of its Common Stock as a
dividend with respect to any shares of its Common Stock, the number of Common
Shares issuable upon exercise of this Warrant shall forthwith be
proportionately increased or decreased. Appropriate adjustments shall also be
made to the purchase price, but the aggregate purchase price payable for the
total number of Common Shares purchasable under this Warrant (as adjusted)
shall remain the same. Any adjustment under this paragraph shall become
effective at the close of business on the date the subdivision or combination
becomes effective or as of the record date of such dividend, or in the event
that no record date is fixed, upon the making of such dividend.
In the event of any reclassification, capital reorganization or other
change in the Common Stock of the Company or in the event of any sale of all
or substantially all of the Company's assets or any merger, consolidation or
restructuring to which the Company is a party in which the Company's
stockholders before the transaction or series of transactions hold less than
50% of the voting power of the surviving entity immediately after the
transaction or series of transactions (other than as a result of a
subdivision, combination or stock dividend provided for above or any
transaction described in the Company's Confidential Private Term Sheet
relating to the
2
<PAGE>
private offering of Units of its securities of which this Warrant is a part),
lawful provision shall be made, and duly executed documents evidencing the
same shall be made and shall be delivered to the Holder in substitution for
the Holder's rights under this Warrant, so that the Holder shall have the
right at any time and from time to time prior to the expiration of this
Warrant to purchase at a total price equal to that payable upon exercise of
this Warrant immediately prior to such event, the kind and amount of shares
of stock or other securities or property receivable in connection with such
reclassification, reorganization or change by a Holder of same number of
shares of Common Stock as were purchasable by the Holder immediately prior to
such reclassification, reorganization or change. In any such case,
appropriate provisions shall be made with respect to the rights and interest
of the Holder so that the provisions hereof shall hereafter be applicable
with respect to any shares of stock or other securities or property
deliverable upon exercise hereof, and appropriate adjustment shall be made to
the purchase price per Common Share payable hereunder, provided the aggregate
purchase price shall remain the same.
Upon any adjustments of the number of Common Shares issuable upon
exercise of this Warrant or the purchase price pursuant to this paragraph,
the Company within thirty (30) days thereafter shall cause to be prepared a
certificate of the Chief Financial or Accounting Officer of the Company
setting forth the number of Common Shares issuable upon exercise of this
Warrant and the purchase price after such adjustments, and setting forth in
reasonable detail the method of calculation used and cause a copy of such
certificate to be mailed to the Holder of the Warrant.
In the event of dissolution or liquidation of the Company in which the
Company is not a surviving corporation, this Warrant shall terminate, but the
registered owner of this Warrant shall have the right, immediately prior to
such dissolution, liquidation, merger or combination, to exercise this
Warrant in whole or in part to the extent that it shall not have been
exercised.
The foregoing adjustments and the manner of application of the foregoing
provisions may provide for the elimination of fractional share interests.
REGISTRATION RIGHTS
The Company has previously advised the Holder in the aforementioned
Confidential Private Term Sheet that it intends to prepare and file under the
Securities Act of 1933 (the "Act") a Registration Statement not later than
sixty (60) days following completion of the offering of the Units of which
this Warrant is part and has agreed to register the resale of the Common
Shares underlying the Holder's Warrants (the "Covered Shares") and this
Warrant in such Registration Statement. The Company shall bear all of the
costs of such registration that are normally borne by issuers.
3
<PAGE>
In connection with such Registration Statement filed pursuant to the
preceding paragraph, the Company shall prepare and promptly file with the
Securities and Exchange Commission (the "Commission") all amendments,
post-effective amendments and supplements to any such Registration Statement
as may be necessary under the Act and the regulations of the Commission to
permit the sale of the Covered Shares and the Warrant to the public, except
that the Company shall not be required to maintain a current Registration for
any period in excess of the term of this Warrant. The registration rights
provided to the Holder shall be limited to the filing of one Registration
Statement only and upon fulfillment of the terms hereof, the Company shall
have no obligation to register for resale under the Act the Holder's Common
Shares or this Warrant in any subsequent Registration Statements prepared by
the Company.
The rights and obligations of the Holder pursuant to this paragraph may
be exercised only by the Holder, transferees and assigns thereof.
INDEMNIFICATION
When pursuant hereto a Registration Statement registering the resale of
the Common Shares or this Warrant is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each Holder of the
Common Shares and the Warrant covered by such Registration Statement,
amendment or supplement and each person, if any, who controls (within the
meaning of the Act) the Holder, and each underwriter (within the meaning of
the Act) of such securities and each person, if any, who controls) within the
meaning of the Act) any such underwriter, against any losses, claims, damages
or liabilities, joint or several, to which the Holder, any such controlling
person or any such underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities, or actions
in respect thereof, arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any such
Registration Statement or any preliminary prospectus or final prospectus
constituting a part thereof or any amendment or supplement thereto, or
arising out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Holder or
such controlling person or underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
an untrue statement or alleged untrue statement or omission or alleged
omission made in said Registration Statement, said preliminary prospectus,
said final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Holder or any other
Holder for use in the preparation thereof.
4
<PAGE>
The Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed said registration statement
and such amendments and supplements thereto, and each person, if any, who
controls the Company (within the meaning of the Act) against any losses,
claims, damages or liabilities, joint or several, to which the Company or any
such director, officer or controlling person may become subject, under the
Act or otherwise, insofar as such losses, claims, damages or liabilities, or
actions in respect thereof, arise out of or are based upon any untrue or
alleged untrue statement of any material fact contained in said Registration
Statement, said preliminary prospectus, said final prospectus, or said
amendment or supplement, or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in said Registration
Statement, said preliminary prospectus, said final prospectus or said
amendment or supplement in reliance upon and in conformity with written
information furnished by such Holder for use in the preparation thereof; and
will reimburse the Company or any such director, officer or controlling
person for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action.
Promptly after receipt by an indemnified party under this paragraph of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give
the indemnifying party notice of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability
which it may have to any indemnified party otherwise than under this
paragraph.
In case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel reasonably satisfactory to such indemnified
party (however, in the event of disagreement as to the selection of counsel,
the indemnified party shall have the right to select such counsel), and after
notice from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party will not be liable
to such indemnified party under this paragraph for any legal or other
expenses subsequently incurred by such indemnified party in connection with
the defense thereof other than reasonable costs of investigation. Any
settlement of such action shall require the indemnifying party's consent,
which shall not be unreasonably withheld.
5
<PAGE>
MISCELLANEOUS
The Company shall not be required to issue or deliver any certificate
for Common Shares purchased on exercise of this Warrant or any portion
thereof prior to fulfillment of all the following conditions:
(a) The completion of any registration or other qualification of
such shares under any federal or state law or under the rulings or
regulations of the Securities and Exchange Commission or any other government
regulatory body which is necessary;
(b) The obtaining of any approval or other clearance from any
federal or state government agency which is necessary;
(c) The obtaining from the registered owner of the Warrant a
representation in writing that the owner is acquiring such Common Shares for
the owner's own account for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof, if the Warrants and
the related shares have not been registered under the Act; and
(d) The placing on the certificate of an appropriate legend and
the issuance of stop transfer instructions in connection therewith if this
Warrant and the related, Common Shares have not been registered under the Act
to the following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE LAWS OF ANY STATE AND
HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION PERTAINING TO
SUCH SECURITIES AND PURSUANT TO A REPRESENTATION BY THE SECURITY HOLDER
NAMED HEREON THAT SAID SECURITIES HAVE BEEN ACQUIRED FOR PURPOSES OF
INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF REGISTRATION. FURTHERMORE, NO OFFER, SALE,
TRANSFER, PLEDGE OR HYPOTHECATION IS TO TAKE PLACE WITHOUT THE PRIOR
WRITTEN APPROVAL OF COUNSEL OR THE ISSUER BEING AFFIXED TO THIS
CERTIFICATE. THE TRANSFER AGENT HAS BEEN ORDERED TO EXECUTE TRANSFERS OF
THIS CERTIFICATE ONLY IN ACCORDANCE WITH THE ABOVE INSTRUCTIONS."
The Company may make any changes or corrections in this Warrant (i) that
it shall deem appropriate to cure any ambiguity or to correct any defective
or inconsistent provision or manifest mistake or error herein contained; or
(ii) that it may deem necessary or desirable and which shall not adversely
affect the interests of the Holder; provided, however, that this Warrant
shall not otherwise be modified, supplemented or altered in any respect
except with the consent in writing of the Holders representing not less than
50% of the Warrants then outstanding; and provided,
6
<PAGE>
further, that no charge in the number or nature of the securities purchasable
upon the exercise of any Warrant, or any increase in the purchase price
therefor, or any shortening of the Warrant exercise period shall be made
without the consent in writing of the Holders representing such Warrant,
other than such changes as are specifically prescribed by this Warrant as
originally executed.
The terms and provisions of this Warrant shall inure to the benefit of,
and be binding upon, the Company and its successors and assigns.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by the signature of its duly authorized officer.
GEOGRAPHICS, INC.
By:
--------------------------------
President
Dated:
----------------------------
7
<PAGE>
EXHIBIT 10.15
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of the ____ day of ________, 1996, between the person
whose name and address appears on the signature page hereto (individually, a
"Holder" or, collectively with the holders of the Units issued in the
Offering, each as defined below, the "Holders") and GEOGRAPHICS, INC., a
Wyoming corporation having its principal executive office at 1555 Odell Road,
Blaine, WA 98231 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holders are purchasing from the Company (the "Offering") an
aggregate of up to fifty (50) units (subject to increase as determined by the
Company and the placement agent for such Offering) (the "Units) each Unit
consisting of (i) nineteen thousand five hundred twelve (19,512) shares (the
"Shares") of the Company's common stock, no par value per share (the "Common
Stock"), and (ii) nineteen thousand five hundred twelve (19,512) warrants
(the "Warrants") each Warrant to purchase one share (collectively the
"Warrant Shares") of Common Stock, exercisable at any time, commencing on the
date hereof until and through June 1, 1999; and
WHEREAS, the Company desires to grant to the Holder the registration
rights set forth herein with respect to the Shares, the Warrants and the
Warrant Shares;
NOW, THEREFORE, the parties hereto mutually agree as follows:
1. REGISTRABLE SECURITIES. As used herein the term "Registrable Security"
means each of the Shares, the Warrants and the Warrant Shares, as adjusted
pursuant to the provisions of the Warrant; provided, however, that with
respect to any particular Registrable Security, such security shall cease to
be a Registrable Security when, as of the date of determination, (i) it has
been effectively registered under the Securities Act of 1933, as amended (the
"Securities Act") and disposed of pursuant thereto, (ii) registration under
the Securities Act is no longer required for the immediate public
distribution of such Registrable Security, or (iii) it has ceased to be
outstanding. the term "Registrable Securities" means any and/or all of the
securities falling within the foregoing definition of a "Registrable
Security." In the event of any merger, reorganization, consolidation,
recapitalization or other change in corporate structure affecting the Common
Stock, such adjustment shall be made in the definition of "Registrable
Security" as is appropriate in order to prevent any dilution or enlargement
of the rights granted pursuant to this Article 1.
2. AUTOMATIC REGISTRATION. The Company shall file a registration
statement covering the Registrable Securities (the "Registration Statement")
with the Securities and Exchange
<PAGE>
Commission (the "SEC") under the Securities Act within ____________
(____) days from the date hereof (the "Required Filing Date") and shall use
its best efforts to cause such Registration Statement to become effective
under the Securities Act as soon as practicable thereafter and shall maintain
the effectiveness of the Registration Statement until the earlier of (i) the
date that all of the Registrable Securities have been sold, (ii) the
expiration of the term of the Warrants, or (iii) the date that all of the
holders thereof receive an opinion of counsel to the Company that the
Registrable Securities (or components thereof) may be sold under the
provisions of Rule 144(k) promulgated under the Securities Act (or any
successor provision), so as to permit the public offer and sale of the
Registrable Securities (or components thereof).
3. COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. The Company
covenants and agrees as follows:
(a) In connection with any registration under Article 2 hereof, the
Company shall use its best efforts to cause the Registration Statement to
become effective as promptly as possible and, if any stop order shall be
issued by the Commission in connection therewith, to use its reasonable
efforts to obtain the removal of such order. Following the effective date of
a Registration Statement, the Company shall, upon the request of the Holder,
forthwith supply such reasonable number of copies of the Registration
Statement, preliminary prospectus and prospectus meeting the requirements of
the Securities Act, and other documents necessary or incidental to the public
offering of the Registrable Securities, as shall be reasonably requested by
the Holder to permit the Holder to make a public distribution of the Holder's
Registrable Securities. The obligations of the Company hereunder with respect
to the Holder's Registrable Securities are subject to the Holder's furnishing
to the Company such appropriate information concerning the Holder, the
Holder's Registrable Securities and the terms of the Holder's offering of
such Registrable Securities as the Company may reasonably request in writing.
(b) The Company shall pay all costs, fee and expenses in connection
with all Registration Statements filed pursuant to Article 2 hereof,
including, without limitation, the Company's legal and accounting fees,
printing expenses, and blue sky fees and expenses; provided, however, that
the Holder shall be solely responsible for the fees of any counsel retained
by the Holder in connection with such registration and any transfer taxes or
underwriting discounts, commissions or fees applicable to the Registrable
Securities sold by the Holder pursuant thereto.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Registrable Securities included in a
Registration Statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the holders of such
securities, provided that the
2
<PAGE>
Company shall not be obligated to execute or file any general consent to
service of process or to qualify as a foreign corporation to do business
under the laws of any such jurisdiction.
(d) Nothing contained in this Agreement shall be construed as
requiring any Holder to exercise his Warrants prior to the initial filing of
any Registration Statement or the effectiveness thereof.
4. ADDITIONAL TERMS.
(a) The Company shall indemnify and hold harmless the Holder and each
underwriter, within the meaning of the Securities Act, who may purchase from
or sell for the Holder, any Registrable Securities, from and against any and
all losses, claims, damages and liabilities caused by any untrue statement of
a material fact contained in the Registration Statement, any other
registration statement filed by the Company under the Securities Act with
respect to the registration of the Registrable Securities, any post-effective
amendment to such registration statements, or any prospectus included therein
or caused by any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by
any such untrue statement of omission based upon information furnished or
required to be furnished in writing to the Company by the Holder or
underwriter expressly for use therein, which indemnification shall include
each person, if any, who controls either the Holder or underwriter within the
meaning of the Securities Act and each officer, director, employee and agent
of the Holder and underwriter; provided, however, that the indemnification in
this Article 4(a) with respect to any prospectus shall not inure to the
benefit of the Holder or underwriter (or to the benefit of any person
controlling the Holder or underwriter) on account of any such loss, claim,
damage or liability arising from the sale of Registrable Securities by the
Holder or underwriter, if a copy of a subsequent prospectus correcting the
untrue statement or omission in such earlier prospectus was provided to the
Holder or underwriter by the Company prior to the subject sale and the
subsequent prospectus was not delivered or sent by the Holder or underwriter
to the purchaser prior to such sale; and provided further, that the Company
shall not be obligated to so indemnify the Holder or any such underwriter or
other person referred to above unless the Holder or underwriter or other
person, as the case may be, shall at the same time indemnify the Company, its
directors, each officer signing the Registration Statement and each person,
if any, who controls the Company within the meaning of the Securities Act,
from and against any and all losses, claims, damages and liabilities caused by
any untrue statement of a material fact contained in the Registration
Statement, any registration statement or any prospectus required to be filed
or furnished by reason of this Agreement or caused by any omission to
3
<PAGE>
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or omission based
upon information furnished in writing to the Company by the Holder or
underwriter expressly for use therein.
(b) If for any reason the indemnification provided for in the
preceding section is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss, claim, damage,
liability or expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by the indemnified party as a result of such loss,
claim, damage or liability in such proportion as is appropriate to reflect
not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and
the indemnifying party, as well as any other relevant equitable
considerations.
(c) Neither the filing of a Registration Statement by the Company
pursuant to this Agreement nor the making of any request for prospectuses by
the Holder shall impose upon the Holder any obligation to sell the Holder's
Registrable Securities.
(d) The Holder, upon receipt of notice from the Company that an event
has occurred which requires a post-effective amendment to the Registration
Statement or a supplement to the prospectus included therein, shall promptly
discontinue the sale of Registrable Securities until the Holder receives a
copy of a supplemented or amended prospectus from the Company, which the
Company shall provide as soon as practicable after such notice.
(e) If the Company fails to keep the Registration Statement referred
to in Article 2 above continuously effective during the requisite period, then
the Company shall promptly use its best efforts to update the Registration
Statement or file a new registration statement covering the Registrable
Securities remaining unsold, subject to the terms and provisions hereof.
5. GOVERNING LAW. The Registrable Securities will be, if and when issued,
delivered in the State of Washington. This Agreement shall be deemed to have
been made and delivered in the State of Washington and shall be governed as
to validity, interpretation, construction, effect and in all other respects
by the internal substantive laws of the State of Washington, without giving
effect to the choice of law rules thereof.
6. AMENDMENT. This Agreement may only be amended by a written instrument
executed by the Company and the Holder.
4
<PAGE>
7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of
the parties hereto with respect to the subject matter hereof, and supersedes
all prior agreements and understandings of the parties, oral and written,
with respect to the subject matter hereof.
8. EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same document.
9. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed duly given when delivered
by hand or mailed by registered or certified mail, postage prepaid, return
receipt requested, as follows:
If to the Holder, to his or her address set forth in the Subscription
Agreement submitted in connection with this Offering or on the signature page
of this Amendment.
If to the Company, to the address set forth on the first page of this
Agreement.
10. BINDING EFFECT; BENEFITS. This Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their respective heirs, legal
representatives and successors. Nothing herein contained, express or implied,
is intended to confer upon any person other than the parties hereto and their
respective heirs, legal representatives and successors, any rights or
remedies under or by reason of this Agreement.
11. HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the
meaning or interpretation of any the terms or provisions of this Agreement.
12. SEVERABILITY. Any provision of this Agreement which is held by a
court of competent jurisdiction to be prohibited or unenforceable in any
jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions of this Agreement or affecting the validity or
enforceability of such provision in any other jurisdiction.
5
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto as of the date first above written.
GEOGRAPHICS, INC.
By:
------------------------
Ronald Deans, President
HOLDER:
---------------------------
[Name]
---------------------------
[Address]
---------------------------
---------------------------
6
<PAGE>
EXHIBIT 11.1
GEOGRAPHICS, INC.
STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $(7,950,301) $1,232,024 $747,742
Weighted average common shares outstanding 9,322,278 6,606,499 4,549,101
--------- --------- ---------
Net income (loss) per share $ (0.85) $ 0.19 $ 0.16
-------- ------ ------
-------- ------ ------
</TABLE>
<PAGE>
EXHIBIT 21.1
GEOGRAPHICS, INC.
LIST OF SUBSIDIARIES
1. Geographics Marketing Canada, Inc., incorporated under the laws of Canada
and doing business in the name of Geographics Marketing Canada, Inc.
2. Geographics Europe Limited, incorporated under the laws of the United
Kingdom and doing business in the name of Geographics Europe Limited
3. Geographics Pty. Limited, incorporated under the laws of Australia and
doing business in the name of Geographics Pty. Limited
<PAGE>
EXHIBIT 23.1
CONSENT OF MOSS ADAMS LLP
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-10051) of Geographics, Inc. (the "Company")
pertaining to the Company's 1996 Stock Option Plan of our report dated August
26, 1997 with respect to the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1997.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Geographics, Inc.
listed in Item 14. This financial statement schedule is the responsibility of
the Corporation's management. Our responsibility is to express an opinion
based on our audits. In our opinion, the financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Bellingham, Washington MOSS ADAMS LLP
September 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 708,757
<SECURITIES> 0
<RECEIVABLES> 7,469,341
<ALLOWANCES> (814,841)
<INVENTORY> 9,457,874
<CURRENT-ASSETS> 18,407,857
<PP&E> 15,294,820
<DEPRECIATION> 4,462,589
<TOTAL-ASSETS> 30,245,701
<CURRENT-LIABILITIES> 18,006,307
<BONDS> 4,322,371
0
0
<COMMON> 15,574,018
<OTHER-SE> (7,656,995)
<TOTAL-LIABILITY-AND-EQUITY> 30,245,701
<SALES> 23,840,506
<TOTAL-REVENUES> 23,840,506
<CGS> 20,378,594
<TOTAL-COSTS> 9,723,210
<OTHER-EXPENSES> 681,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,063,075
<INCOME-PRETAX> (8,006,273)
<INCOME-TAX> (55,972)
<INCOME-CONTINUING> (7,950,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,950,301)
<EPS-PRIMARY> (.85)
<EPS-DILUTED> (.85)
</TABLE>
